How to Earn $VINU and $USDT by Providing Liquidity on PancakeSwap (v3) | by Vita Inu (VINU) | Aug 2023

The project team has decided to move most of our liquidity from the VINU/BNB trading pair on PancakeSwap (v2) to the VINU/USDT trading pair on PancakeSwap (v3). Here is an updated guide on how to earn both $VINU and $USDT by providing liquidity on PancakeSwap (v3). There are some important differences, so please pay attention to them!

Liquidity pools are an essential part of decentralized finance (DeFi) systems. The basic idea is simple: tokens are placed in a large pool managed by a smart contract. Swaps or trades are processed through these liquidity pools. For example, if someone tries to buy VINU with USDT, their transaction will involve depositing USDT into a liquidity pool and withdrawing VINU from that pool. When someone sells VINU for USDT, their transaction involves depositing VINU into the liquidity pool and withdrawing USDT from that pool. All of these actions are performed automatically and seamlessly through a smart contract.

Many DeFi schemes allow anyone to stake their tokens in liquidity pools to earn rewards. The reason is simple. The more people stake their tokens in liquidity pools, the more liquidity there will be and the less volatile the price of the token will be. This means that people can make larger trades or swaps through the liquidity pool without much impact on the price.

To encourage users to invest their tokens in liquidity pools, most DeFi schemes offer various incentives and rewards. The more people trading on PancakeSwap via your chosen trading pair/liquidity pool, the more rewards you will get!

As with all DeFi systems, there are some risks. Please inform yourself in advance about the provision of liquidity.

– https://academy.binance.com/en/articles/what-are-liquidity-pools-in-defi

– https://docs.pancakeswap.finance/products/pancakeswap-exchange/pancakeswap-pools

There are some key differences between PancakeSwap (v2) and PancakeSwap (v3) in terms of how trading fees are charged.

PancakeSwap (v2)

PancakeSwap (v2) charges a 0.25% fee (based on the size of the trade) for all trades. Of this amount, 0.17% is added to the liquidity pool as a liquidity provider reward. Let’s see how it works in practice.

• A user uses 1000 USDT to buy 100,000,000 VINU.
• The trading fee for this trade is 0.25% = 2.5 USDT and 250,000,000 VINU.
• From this amount, 0.17% is added back to the liquidity pool = 1.7 USDT and 170,000,000 VINU. The rest goes to the PancakeSwap platform.
• This amount can be shared by the users who stake their tokens in the VINU/USDT liquidity pool based on the share of their tokens in relation to the size of the total pool.

For example, if there is a daily trading volume of $1,000,000 for the VINU/USDT trading pair, $1,700 will be split among everyone who provided liquidity!

PancakeSwap (v3)

With PancakeSwap (v3), you are the liquidity provider! – can choose the fees you want to charge for trades. The available options are: 0.01%, 0.05%, 0.25% and 1%. In version 3 there is now much more flexibility for liquidity providers.

You can now choose the trading fees you want to charge.

As with PancakeSwap (v2), a certain portion of trading fees are split between those providing liquidity. The proportion is variable –

• 67% of trading fees are split between those charging 0.01% trading fees
• 66% of trading fees are split between those charging 0.05% trading fees
• 68% of trading fees are split between those charging 0.25% trading fees
• 68% of trading fees are split between those charging 1% trading fees

There are also important differences between PancakeSwap (v2) and PancakeSwap (v3) in terms of liquidity margin.

PancakeSwap (v2)

With PancakeSwap (v2), the liquidity you provide is spread across the entire trade – that is, from $0 to infinity. For example, consider the VINU/BNB pair in version 2.

• As people buy $VINU, there will be less $VINU and more $BNB in ​​the whole pool.
• When people sell $VINU, there is more $VINU and less $BNB in ​​the whole pool.

PancakeSwap (v3)

In PancakeSwap (v3), liquidity providers can choose the trade area they want to provide liquidity for. For example, you can choose not to provide liquidity for the entire range (from $0 to infinity) – which spreads out your liquidity. Instead, you can choose to only provide liquidity for a narrow price range – concentrating your liquidity. Suppose you provide liquidity for the $VINU/$USDT pair in the range of $0.00000001 to $0.00000002. There are also some preset ranges that you can select – 10%, 20% or 50% deviation from the current price.

If you concentrate your liquidity, it will only be active within that range and not spread across the whole range.

You can now determine the range for which you want to provide liquidity.

Concentrating your liquidity offers advantages.

• Capital efficiency: By providing liquidity to a narrower range, your cash is used more effectively (compared to spreading it across the range). This means you need to allocate fewer funds to earn the same fees. Or you can make more money by providing the same amount.
• Less Slippage: When liquidity providers concentrate their liquidity in a specific area, the liquidity within that area is much higher. This means that trades – even large trades – within this range will experience less price impact and less slippage.

However, concentrating your liquidity in a narrow area also carries certain risks (compared to providing liquidity for the entire area).

• Ephemeral Loss. The risk of temporary losses is greater when you concentrate your liquidity. Suppose you provide liquidity for the $VINU/$USDT pair in the range of $0.00000001 to $0.00000002. You add both $VINU and $USDT tokens to your liquidity position. Now, when the price of $VINU rises above $0.00000002, you will find that your liquidity position contains only $USDT tokens. The $VINU in your liquidity position would have been sold to buyers. If the price of $VINU continues to rise – e.g. B. to $0.00000005 – means you would have missed out on profits compared to simply keeping $VINU or providing liquidity for the full range. This is because all your $VINU tokens were sold when the price reached $0.00000002.
• Technical Complexity. As you can see above, deciding whether and where to concentrate your liquidity is technically complicated. This is not for everyone.
• time consuming. Even if you know what you are doing, you still need to spend some time regularly checking the token’s price and rebalancing your liquidity position.

We used project funds to provide liquidity on PancakeSwap (v3) with the following parameters.

• Trading fees: 0.25%
• Trading area: full area

If you are new to liquidity provision, we recommend that you follow the same strategy.

If you’re a veteran, feel free to focus your liquidity in any way you see fit. When concentrating your liquidity, it would be a good idea to pay attention to where people are concentrating their liquidity.

In the image above, we see that people have concentrated their liquidity in a small area (from -15% of current price to +80% of current price). It is up to you to decide how to act on this information.

Again, as with all DeFi schemes, there are some risks. Please inform yourself in advance about the provision of liquidity.

– https://academy.binance.com/en/articles/what-are-liquidity-pools-in-defi

– https://docs.pancakeswap.finance/products/pancakeswap-exchange/pancakeswap-pools

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