Why Is Approve Necessary in PancakeSwap?
With so many people eager to hop on the cryptocurrency train, platforms like PancakeSwap have quickly gained popularity. PancakeSwap is a decentralized exchange that allows users to trade tokens. It’s built on the Binance blockchain and therefore requires specific protocols to be executed for trades to occur. That’s where the approval mechanism comes in. If you are wondering why it’s necessary to approve tokens and transactions on PancakeSwap, keep reading. This article will tell you all you need to know about the process.
Why Do I Need to Approve on PancakeSwap?
A decentralized exchange (DEX) allows crypto traders to carry out transactions without an intermediary. You can swap one token for the next without dealing with order books. PancakeSwap relies on having a well-funded liquidity pool to facilitate these trades. Users place their funds in a central location (liquidity pool) from which others draw the tokens they require. Therefore, a trade doesn’t have to be a one-on-one exchange with another user.
PancakeSwap is built on an automated market maker (AMM). An AMM is a protocol that automates the trading process, eliminating the need for a central exchange. Instead of using order books to match trades, this system uses smart contracts to price tokens and provide liquidity. When you place tokens on PancakeSwap, they are essentially locked in by a smart contract. This contract makes them available for trade within the liquidity pool.
The smart contract will require access to your crypto wallet for a trade to occur. Approvals are protocols put in place as industry standards. They prevent smart contracts from accessing your funds without your permission. This is why approvals are necessary on PancakeSwap. They grant permission to smart contracts to trade your assets.
Let’s take a closer look at PancakeSwaps’s smart contracts.
What Is a Smart Contract on PancakeSwap?
A smart contract is a program designed to enforce an agreement automatically. It’s triggered after certain conditions have been met. For instance, if a buyer and a seller agree to trade a certain number of goods at a particular value, a smart contract can be set up with the terms of this arrangement. Once the seller provides the goods, the smart contract kicks in and transfers the funds into the seller’s account. This method ensures that neither party is shortchanged.
Smart contracts on PancakeSwap verify the terms of trade, including defining the token price. This eliminates the need for a third party to perform this function. The smart contract will require access to the tokens and, therefore, to your crypto wallet for swaps to occur. You will only have to grant this permission once for each token.
Types of Smart Contracts on PancakeSwap
Because PancakeSwap is built on an AMM, several different contracts will need to be approved when trading on the platform. Let’s take a look at some of them here.
Liquidity pools are at the heart of how PancakeSwap works. By adding liquidity, you increase the number of tokens available for trade. Here’s how to do that.
To add liquidity, you’ll have to commit two token pairs. You will basically be swapping one token for another.
- Open PancakeSwap on your browser
- Hover “Trade” and click Liquidity.
- Tap “Add Liquidity” and then scroll to the “Input” section.
- Press “Select Currency” and choose the token you would like to deposit.
- Move to the “Output” section, hit “Select Currency,” and select the second token you would like to deposit.
- Go back to “Input” and fill in the token amount you want to trade.
- The “Output” category will then autofill.
- Tap the “Enable Cake” button at the bottom of the screen.
- Click the “Confirm” pop-up message from your crypto wallet.
- Tap “Supply” and confirm the transaction again with your crypto wallet.
Your new LP (liquidity) token balance will be reflected at the bottom of the screen.
Clicking the “Confirm” button during this process executes the smart contract required to add liquidity to PancakeSwap. It allows the platform to access funds from your crypto wallet.
Once you get your LP tokens through the liquidity pool, you can now stake them to earn some returns. Staking means holding these coins in certain pools or farms and keeping them there until they earn interest.
PancakeSwap charges a transaction fee of 0.25%, of which 0.17% of it is returned to the liquidity pools. It’s distributed amongst the liquidity holders and incentivizes them to add their funds to the platform. This is the money that you earn when you stake your tokens. To stake tokens on PancakeSwap, follow the steps outlined below.
- Navigate to the “Farms” section and pick the token you want to stake.
- Tap “Approve Contract” in the pop-up message that appears to confirm that you are okay with the transaction and with the fee shown.
- Select the amount you would like to stake and press “Confirm.”
To stake crypto on PancakeSwap, you will have to approve the smart contract that makes it possible to access your funds.
PancakeSwap is a decentralized platform built on an automated market maker. This system uses smart contracts to facilitate cryptocurrency trades. For these contracts to be executed, platform users are required to approve the transactions. This allows PancakeSwap to access their cryptocurrency wallets, making the trades possible. Therefore, approval is necessary on the platform because it grants PancakeSwap permission to carry out transactions.
Have you approved transactions on PancakeSwap? Let us know in the comments below.