If you’re a crypto enthusiast looking to understand what are the differences between PancakeSwap V2 and V3, you’ve come to the right place.
In this blog, we’ll break down the key differences between the two versions of this popular decentralized exchange.
So by the end of this journey, you can decide which one is right for you.
What Are Liquidity Providers?
Liquidity providers are like financial matchmakers. They participate in platforms like stock exchanges or cryptocurrency markets, ensuring that when someone wants to buy or sell an asset, there’s always a partner available. They do this by constantly offering to buy and sell assets.
Here’s the deal: These providers earn money through transaction fees and spreads (the difference between buying and selling prices).
It’s like running a lemonade stand. If you always have lemonade ready, you profit when thirsty customers come by.
Now, you might wonder: Who are these liquidity providers? Well, they can be individuals, institutions, or even automated algorithms. Their role is crucial to keeping markets flowing smoothly, which is a win-win for everyone involved.
If you want to know about the role liquidity providers play, or the benefits of liquidity providers, checking our blog on this topic will surely help!
What are PancakeSwap V2 and V3?
PancakeSwap is a decentralized exchange (DEX) that allows users to trade tokens, provide liquidity, and earn yield. It is one of the most popular DEXes on the BNB Smart Chain.
PancakeSwap V2
PancakeSwap V2 was launched in September 2020 and uses the AMM (automated market maker) model.
In an AMM, liquidity providers deposit two tokens into a pool, and traders swap tokens from that pool.
Liquidity providers earn trading fees in proportion to their share of the pool.
Let’s see the historical activity of transactions that clients made using PancakeSwap V2 within the last year –
PancakeSwap V3
PancakeSwap V3 was launched in April 2023 and introduces a number of improvements over V2, including:
- Concentrated Liquidity: Liquidity providers can now choose to concentrate their liquidity within a specific price range. This allows them to earn higher fees on trades that occur within that range.
- Flexible Trading Fees: Traders can now choose to pay a higher or lower trading fee depending on their desired slippage tolerance. Higher fees result in lower slippage, while lower fees result in higher slippage.
What is the Difference between PancakeSwap V2 and V3?
PancakeSwap, a prominent decentralized exchange on the Binance Smart Chain, has been through significant evolutions with its V3 update.
As with any upgrade, users are keen to understand the differences between V2 and V3 to make informed decisions.
Let’s ascertain the primary contrasts between these two versions through a table –
| Feature | PancakeSwap V2 | PancakeSwap V3 |
| Liquidity Distribution | Liquidity is spread across all price ranges. | Liquidity providers can concentrate their liquidity within specific price ranges. |
| Trading Fees | Fixed trading fee of 0.25%. | Traders can opt for higher or lower trading fees based on their slippage tolerance. |
| Liquidity Earnings | Equal potential earnings irrespective of price movement. | Higher earning potential when trades occur within the set price range by the provider. |
| Trade Execution | Standardized execution based on available liquidity. | More efficient matching of traders and liquidity providers based on fee and range preferences. |
A natural question might arise: What does this mean for the average user? In essence, V3 offers a more tailored experience.
Liquidity providers can potentially earn more by focusing on active trading ranges, and traders gain flexibility in fees, balancing speed and cost.
PancakeSwap’s V3 update showcases the platform’s commitment to adapt and innovate, offering users more control and potential efficiency.
As with any platform change, it’s essential to understand these differences to optimize your strategies, whether you’re providing liquidity or making trades.
Always keep abreast of such updates and make decisions aligned with your financial goals.
Concentrated Liquidity and Flexible Trading Fees Explained
The decentralized exchange landscape is evolving rapidly, with platforms constantly innovating to offer the best experience for both traders and liquidity providers.
One such platform, PancakeSwap, recently launched its V3, introducing two pivotal features: concentrated liquidity and flexible trading fees. These features aim to optimize capital efficiency and offer a tailored trading experience.
Let’s dive deep into how these changes work and what they mean for users of the platform.
Concentrated Liquidity
In PancakeSwap V2, liquidity providers spread their liquidity across all price ranges. This means that their liquidity is available for trade at any price.
In V3, liquidity providers can choose to concentrate their liquidity within specific price ranges. This allows them to earn higher fees on trades that occur within those ranges.
For example, a liquidity provider could choose to concentrate their liquidity within a price range of 10% above and below the current price of a token.
This means that their liquidity would only be available for trades that occurred within that price range. If the price of the token moved outside of that range, their liquidity would not be available.
Concentrated liquidity can be more efficient than spreading liquidity across all price ranges.
This is because it allows liquidity providers to focus their liquidity on the price ranges where trading is most active. This can lead to higher fees for liquidity providers.
Flexible Trading Fees
In PancakeSwap V2, there is a fixed trading fee of 0.25%. In V3, traders can choose to pay a higher or lower trading fee depending on their desired slippage tolerance.
Slippage is the difference between the expected price of a trade and the actual price at which the trade is executed.
Traders who are willing to accept higher slippage can pay a lower trading fee. This is because the DEX can execute their trade more quickly and efficiently.
Traders who want to minimize slippage can pay a higher trading fee. This is because the DEX will need to take more time and effort to find a counterparty for their trade.
Flexible trading fees can be beneficial for both traders and liquidity providers. Traders can use them to reduce their trading costs, while liquidity providers can use them to attract more trades and earn higher fees.
You can take a look at the following image to understand how flexible trading works in V3 –
How Concentrated Liquidity and Flexible Trading Fees Work in V3
In PancakeSwap V3, concentrated liquidity and flexible trading fees work together to create a more efficient and capital-efficient market. You can see this impact by looking at the figures in the image below –
Liquidity providers can concentrate their liquidity within specific price ranges to earn higher fees, while traders can choose to pay higher or lower trading fees depending on their desired slippage tolerance.
This system allows the DEX to match buyers and sellers more efficiently while also providing traders with more control over their trading costs.
Here is an example of how concentrated liquidity and flexible trading fees work together in V3:
- A liquidity provider concentrates their liquidity within a price range of 10% above and below the current price of a token.
- A trader wants to buy the token and is willing to accept higher slippage.
- The DEX matches the trader with the liquidity provider, and the trade is executed at a price that is slightly above the current market price.
- The liquidity provider earns a higher fee on the trade because they concentrated their liquidity in the price range where the trade occurred.
- The trader pays a lower trading fee because they are willing to accept higher slippage.
Concentrated liquidity and flexible trading fees are two of the key features that make PancakeSwap V3 a more efficient and capital-efficient DEX.
Benefits of Using PancakeSwap V2 and V3
We have listed the benefits you can get by using PancakeSwap V2. Let’s check these out –
- Simple to Use and Understand: PancakeSwap V2 uses a simpler liquidity provision and trading model than V3. This makes it easier for new users to get started.
- Low Trading Fees: PancakeSwap V2 has a fixed trading fee of 0.25%, which is one of the lowest among DEXes.
- Wide Selection of Tokens: PancakeSwap V2 supports a wide range of tokens, including both popular and niche tokens.
The benefits of using PancakeSwap V3 are as follows –
1. More Efficient and Capital-efficient
PancakeSwap V3 uses concentrated liquidity to improve capital efficiency for liquidity providers.
This means that LPs can earn higher fees on trades that occur within the price range where they have concentrated their liquidity.
2. Lower Slippage for Traders
PancakeSwap V3’s flexible trading fees allow traders to choose a lower fee in exchange for higher slippage.
This can be beneficial for traders who are executing large orders or trading volatile assets.
3. Support for Multiple Blockchains
PancakeSwap V3 is deployed on multiple blockchains, including BNB Smart Chain, Ethereum, and Polygon.
This gives users more flexibility in how they choose to trade and interact with the DEX.
Drawbacks of Using PancakeSwap V2 and V3
PancakeSwap is a decentralized exchange (DEX) that allows users to trade tokens, provide liquidity, and earn yield. It is one of the most popular DEXes on the BNB Smart Chain.
Like any other DEX, PancakeSwap V2 and V3 also have some drawbacks. Let’s discuss the drawbacks of using PancakeSwap V2 and V3.
The drawbacks of using PancakeSwap V2 are as follows –
- Simpler Liquidity Provision Model: PancakeSwap V2 uses a simpler liquidity provision model where liquidity providers spread their liquidity across all price ranges. This can be less efficient.
- Fixed Trading Fees: PancakeSwap V2 has a fixed trading fee of 0.25%. This can be higher than the fees charged by other DEXes.
- No Support for Multiple Blockchains: PancakeSwap V2 is only deployed on the BNB Smart Chain.
Let’s now point out the drawbacks of using PancakeSwap V3 –
- More Complex to Use and Understand: PancakeSwap V3’s concentrated liquidity and flexible trading fees features can be more complex to understand and use.
- Increased Risk for Liquidity Providers: Liquidity providers who use concentrated liquidity in PancakeSwap V3 are more exposed to risk if the price of the token they provide liquidity for moves outside their concentrated price range.
- Higher Fees for Traders: Traders who choose to pay lower trading fees in PancakeSwap V3 may experience higher slippage.
PancakeSwap is a popular DEX with a number of advantages, but it is important to be aware of the drawbacks before using it.
By understanding the drawbacks, you can minimize your risks and make more informed decisions when trading and providing liquidity on PancakeSwap.
Which One Should You Choose Between Pancake Swap V2 and V3?
Both PancakeSwap V2 and V3 have their own advantages and disadvantages. Which version is right for you depends on your individual needs and preferences.
- If you are a new user or you prefer a simpler trading experience, then PancakeSwap V2 is a good choice.
- If you are an experienced user and you want to maximize your earnings or reduce slippage, then PancakeSwap V3 is a good choice.
PancakeSwap V3/V2 Migration
PancakeSwap V3 is a major upgrade over the previous version, with a number of new features and improvements.
If you’re a PancakeSwap user, you’re probably wondering how to migrate from V2 to V3.
Migration Process
Migrating from V2 to V3 is a relatively straightforward process. Here’s a step-by-step guide:
- Go to the PancakeSwap V3 migration page.
- Connect your wallet to PancakeSwap.
- Click on the “Migrate” button.
- Review the migration details and click on the “Confirm” button.
- Your assets will be migrated to V3.
The migration process is usually very quick, but it may take a few minutes during peak times.
Your assets will be safe during the migration process. PancakeSwap has implemented a number of security measures to protect your assets.
You do not need to migrate to V3 to continue using PancakeSwap. However, V3 offers a number of advantages over V2, such as concentrated liquidity and flexible trading fees.
Migrating from PancakeSwap V2 to V3 is a quick and easy process. Once you’ve migrated, you’ll be able to take advantage of all the new features and improvements that V3 has to offer.
Bonus Tip
If you have a lot of assets to migrate, it’s best to do it during off-peak hours to avoid any delays.
You may also want to consider migrating your assets in batches to reduce the risk of anything going wrong.
Wrapping Up
Now that you know what is the difference between PancakeSwap V2 and V3, you can decide which version is right for you.
V2 is simpler to use and understand, while V3 offers more flexibility and control.
Ultimately, the best way to decide is to experiment with both versions and see which one you prefer.
FAQ About PancakeSwap V2 and V3
1. Which version of PancakeSwap should I use?
If you are a new user, it is recommended to start with PancakeSwap V2. It is simpler to use and understand.
If you are an experienced user and want to maximize your earnings or reduce slippage, then PancakeSwap V3 is a good choice.
2. What strategies can I use to reduce slippage when trading on PancakeSwap V3?
There are a few strategies that traders can use to reduce slippage on PancakeSwap V3:
- Choose a Higher Trading Fee: Traders who are willing to pay a higher trading fee will experience lower slippage.
- Place Smaller Orders: Larger orders are more likely to experience slippage. Traders can break up their orders into smaller trades to reduce slippage.
- Use Limit Orders: Limit orders allow traders to specify the exact price at which they want to buy or sell a token. This can help to reduce slippage, but it is important to note that limit orders may not always be executed.
3. What are the benefits of using PancakeSwap V3 on multiple blockchains?
Using PancakeSwap V3 on multiple blockchains gives users more flexibility and choice. For example, traders can choose to trade on the blockchain with the lowest fees or the least congestion.
Liquidity providers can also choose to provide liquidity on the blockchain where they expect the most trading activity.
Using PancakeSwap V3 on multiple blockchains helps to reduce the risk of centralization.
If one blockchain experiences an outage or other disruption, users can still access PancakeSwap V3 and trade tokens on other blockchains.
