Disclaimer and Risk Warning: This content is for general information and educational purposes only, without representation or warranty. It should not be construed as financial, legal, or other professional advice, nor intended to recommend purchasing any specific product or service. You should seek advice from appropriate professional advisors.

How Single-Sided Liquidity Works

Single-sided liquidity was introduced as a streamlined solution to the complexities of traditional liquidity provision in DeFi. Unlike conventional models that require users to contribute two different tokens, single-sided liquidity allows liquidity providers to deposit just one token into a pool. This approach aims to simplify the process while also addressing risks, such as impermanent loss, associated with managing two assets.

In single-sided liquidity, the protocol takes care of the other side of the liquidity pair, either through its reserves or by employing algorithmic strategies to maintain balance. Once a user deposits a single token, the protocol automatically pairs it with another asset, ensuring a smooth addition of liquidity without the need for the user to manage multiple tokens manually.

Benefits of Single-Sided Liquidity

Simplified Participation

One of the most significant advantages of single-sided liquidity is its simplicity. Unlike traditional liquidity models that require managing two tokens in equal amounts, single-sided liquidity allows you to provide just one token. This opens up liquidity provision to a broader audience, including users who may find managing multiple assets complex or overwhelming.

Streamlined Management

By only having to provide one token, users no longer need to worry about balancing or rebalancing their liquidity. This significantly reduces the ongoing management complexity and allows you to focus on other aspects of your DeFi strategy. It simplifies liquidity provision for those who want a hands-off experience.

Lower Exposure to Price Fluctuations

Traditional liquidity pools expose users to impermanent loss—a risk that occurs when the price of one token in the pair fluctuates more than the other. With single-sided liquidity, exposure to price volatility between paired tokens is minimized, lowering the risk. Although fluctuations in the single token still affect your position, this model typically offers more stability than managing two tokens with different price trends.

Potential Risks of Single-Sided Liquidity

While single-sided liquidity offers many benefits, it is important to be aware of potential risks.

Lower Liquidity

Since this concept is relatively new, some pools may have lower liquidity compared to traditional dual-token pools. This could lead to reduced trading efficiency and possibly lower rewards for liquidity providers.

Impermanent Loss Risk

Although the risk of impermanent loss is reduced, it is not completely eliminated. If the protocol pairs your token with a more volatile asset, fluctuations in the paired token’s value can still affect the rewards..

Smart Contract Vulnerabilities

Single-sided liquidity, like most DeFi products, relies on smart contracts to manage transactions and balance liquidity. Bugs or vulnerabilities in these contracts could lead to significant losses for liquidity providers, even with thorough auditing.

Simplifying Liquidity Provision with PancakeSwap’s Zap Feature

To further ease the liquidity provision process, PancakeSwap has launched its Zap feature, powered by KyberSwap for BNB Chain v3 and 20+ selected Ethereum and Arbitrum pairs. This feature allows users to add liquidity with just one token, making it easier and more attractive to use the platform. By reducing the need for manual token swaps or balancing pairs, PancakeSwap’s Zap feature simplifies the entire process.

Here’s what Zap can do for you:

1. Single-Token Liquidity Provision: You only need to provide one token instead of two for liquidity pools. Zap will automatically convert part of the token into its corresponding pair and balance the pool, eliminating the need for multiple transactions.

2. Automatic Rebalancing: Even if your token pair is not in the default 50/50 balance, Zap will automatically rebalance it, making liquidity provision straightforward and efficient.

3. Seamless Liquidity Removal: When you decide to remove liquidity, Zap allows you to choose which token you’d like to receive. It will handle the conversion and return your chosen token, making the withdrawal process effortless.

4. Slippage Protection: Zap helps protect users from high price impacts by adjusting the token amounts to minimize slippage during swaps.

Step-by-Step: Using the PancakeSwap Zap Feature

Zap In (Add Liquidity)

1. Visit the Liquidity Page: Navigate to PancakeSwap’s Liquidity page and choose "Add Liquidity." By default, the Zap feature is turned on for every user.
2. Select the Trading Pair: Choose the pair you want to add liquidity to by selecting the two tokens.
3. Choose One Token: You can choose to provide either one token or both. If you decide to provide only one token, simply enter the desired amount. A message will appear—click "Click Here to Start" to proceed.

4. Review the Transaction:Zap will automatically convert half of your provided token into the other asset in the pair to maintain a 50/50 balance. Before proceeding, review the details carefully. Zap will show you how many LP tokens you will receive and provide a breakdown of how the tokens are balanced. Please note, Zap will charge a fee for facilitating this service.

5. Confirm the Zap: Once you’re satisfied with the transaction, click “Supply” to finalize the process. Your liquidity is now added to the pool with just one token.

Zap Out (Remove Liquidity)

1. Visit the Liquidity Page: Head back to the Liquidity page and locate your liquidity pair under "Your Liquidity."
2. Click “Remove”: Select the pair you want to remove liquidity from.
3. Choose the Token: Decide which token you’d like to receive when withdrawing liquidity. Zap will automatically convert the other token and provide you with your preferred token.
4. Review and Confirm: Verify the transaction details and click "Remove" to complete the process. Zap will handle the rest, ensuring you receive the correct amount in the selected token.

With single-sided liquidity and the Zap feature, DeFi continues to evolve toward a more user-friendly and efficient system, opening the door for more participants to join and benefit from decentralized exchanges.