PancakeSwap is one of the largest decentralized exchanges that are native to the BNB Chain.
It shares similarities with other decentralized exchanges, such as Uniswap, for example, but while that exchange specializes in Ethereum-based tokens, PancakeSwap lets users swap their coins for other coins without any input or requirement from a middleman, all of which are built on top of the BNB Chain.
However, PancakeSwap isn’t just limited to swapping, and users are also given the opportunity to lock liquidity within the decentralized exchange.
However, if this is your first time locking liquidity, let’s go over what that process entails first, so you have a broader level of understanding as to what you are attempting to do.
Liquidity Pools Explained
Liquidity pools are specifically created as a means of enabling users to essentially buy and sell cryptocurrencies through decentralized exchanges or any other decentralized finance (DeFi) platform without any need for centralized market makers.
In other words, you can view a liquidity pool as this crowdsourced pool of cryptocurrencies or tokens, which is locked in a smart contract that is used to then facilitate the trading of assets on a decentralized exchange (DEX).
Now, unlike traditional markets of buyers and sellers, many DeFi platforms will typically implement what is known as an automated market maker (AMM) model, which would allow digital assets to get traded automatically. This is where liquidity pools have their usage.
To summarize, you can view a liquidity pool as a sum of tokens that serves to be a buffer or a reserve for the DEX. These are essentially the tokens that users end up buying at the point in time when they decide to invest in a project.
If DEXs did not have these pools, users would be required to wait for the necessary amount of tokens to be sold in order to get them. A liquidity pool ensures that there is an instantaneous opportunity for the purchase of this token.
However, we need to remember that a pool does not consist of just a single token and instead matches a token with another token that forms a pair so that the users can take the necessary amount of the first token and put back an equal sum in a different token. This is what essentially forms the price.
Liquidity Locking Explained
Whenever a cryptocurrency-based project based on blockchain technology ends up launching within any DEX, security plays an important role as it is an essential part of providing investors with the best experience.
Through the process of locking liquidity, a project can showcase that it is planning to progress and develop itself throughout years in the future. This ensures that not a single person from the team, or the owner, will, at any point in time, as long as they have liquidity locked within a pool, take away the liquidity and leave the pool empty. This is why liquidity locking is essential.
Liquidity can be described as a pool that features funds. Each token developer needs to have them as a means of enabling them the functionality of buying and selling tokens instantaneously.
If this pool did not exist, investors would essentially be promoted to wait an indefinite amount of time, until someone ends up matching their order.
The main reason why this is dubbed an “indefinite” wait time, is that the trade might never be completed, depending on the popularity of the token.
Liquidity, however, is created through the process of pooling the new token, alongside a token of an established value, in a DEX such as PancakeSwap.
Furthermore, the individual that provides the liquidity in this case, would receive LP tokens, or liquidity pool tokens for their efforts.
These can, later on, be used to withdraw the funds in the pool.
The main reason why liquidity needs to be locked this way is so that developers do not have the opportunity to conduct what is known as a “rug pull.”
When an investor ends up buying tokens from an exchange, this would lead to a point in time when the liquidity pool can essentially be filled with coins or tokens that have their value established.
This occurs for one simple reason. Investors are pushing in tokens to the pool that have a value that is established, and for these efforts, get new coins.
However, there is another issue that might arise here. Imagine that the developers would just withdraw the funds, cash them out, and abandon the project. This is where locking the liquidity comes into the picture.
As such, liquidity is locked through renouncing the ownership of the liquidity pool (LP) tokens for a predefined period of time.
To achieve this, they get sent to a specific smart contract that features a time-lock function.
What this results in is investor confidence that the development team behind the token in question cannot really just get the money from the liquidity and run.
How to Lock Liquidity on PancakeSwap?
Now that you understand a bit more about liquidity pools and how they work, as well as why there is a need for locking liquidity, we can now move forward with learning how to lock liquidity on PancakeSwap.
Before you can begin locking liquidity on top of PancakeSwap, you will need to create a cryptocurrency wallet.
When it comes to the types of wallets supported by PancakeSwap, you have these options:
- Binance Wallet
- Coinbase Wallet
- Trust wallet
- Wallet Connect
- Opera wallet
You can navigate to any single one of these wallet’s websites and create and install a wallet to your browser, after which you will need to fill that wallet with cryptocurrencies from a centralized exchange, so you can use them on a decentralized exchange.
This is a simple and straightforward process, so from this point onward, we will assume that you have access to a cryptocurrency wallet with cryptocurrencies already in it, which you will be using to lock liquidity on PancakeSwap.
Now, the easiest way through which you can lock liquidity for a specific token on PancakeSwap is through the usage of a trusted third-party locker.
This is due to the fact that each of these lockers uses an automated time-lock contract as a means of keeping their LP tokens safe for a pre-specified amount of time. This means that after this lock period ends, you can easily retrieve your LP tokens from your wallet.
For the purposes of this guide, we will be using Mudra Manager, specifically the Mudra Liquidity Locker.
Start by connecting your wallet, which you can do so by scanning a QR code, or if you are on a desktop, choosing your preferred wallet option.
Once you are logged in, you should see your wallet address added in the “Connected Wallet” part of the page.
Here, you will need to enter the PancakeSwap LP Token address right under it.
If you do not know your lock LP token address, you can just enter your original token address instead. The Mudra Liquidity Locker should now recognize your token and pair address and will showcase the pool information.
It will also fetch the available liquidity pool or LP token amount in your wallet. Here, you will need to enter the liquidity pool amount that you want to lock. If you want to lock all of your tokens, you can click on the “Max” button and select the lock period.
You can either use the calendar or just add years to the selected date using the +1 year option.
Then you will need to select the fee type. You can either choose to pay in LP or through a small percentage of your LP tokens.
Once you conduct all of the aforementioned steps, all that will be left for you to do is to approve Mudra from your cryptocurrency wallet to transfer LP tokens on your behalf.
Next, confirm the approved transaction from your wallet. Note that this might take a few seconds to fully complete. Once approved, you can click on the “Lock LP Tokens” button and confirm the transaction from your wallet.
You should now see a successful notification on the lot transaction completion.
That is everything you need to do in order to lock your liquidity through the usage of a third-party service such as Mudra. You can additionally view and manage your lock by going to the Manage tab. Here, you can see all of the locks that you have locked through the utilization of the service.
Note that while there are many third-party services such as this one, all of them are similar in terms of functionality and aim to streamline the process as much as possible. Furthermore, each one of them has different fees, which is something you need to keep in mind.
Hopefully, now you have a higher level of understanding of why liquidity pools are important, how liquidity locking actually works, and how you can lock your own cryptocurrency tokens through the utilization of third-party services that enable this as a functionality.
By following this guide step-by-step, you will be on your way towards locking liquidity within minutes and can then utilize this knowledge for a variety of different projects that you will pursue within the crypto space.