Centralized crypto exchanges (CEXs) are important players that have dominated the crypto industry in recent years. It makes it easy for new users to enter the crypto world. However, for some crypto users, CEX does not conform to the basic principle of decentralization of cryptocurrencies which gives users complete control over their assets. Therefore, some people from the crypto community created a decentralized crypto exchange (DEX) as an alternative to CEX. One of them is PancakeSwap. Then, what is PancakeSwap (CAKE)? What is its role and how is it used? This article will discuss PancakeSwap in detail.
- 🪙 PancakeSwap is a decentralized exchange (DEX) that allows users to exchange various crypto assets without third parties and is non-custodial.
- 💻 PancakeSwap is a DEX that utilizes automated market makers (AMM) technology to match 2 parties wishing to exchange crypto assets. In an AMM, a DEX takes advantage of a user-generated liquidity pool. Users who keep their crypto assets in the liquidity pool will be rewarded with trading fees.
- 🤑 You can take advantage of various financial products available on PancakeSwap such as farming, staking, LP, and participating in a lottery. The platform incentive scheme is one of the most profitable if you are willing to take the risk to use it.
- ⚖️ CAKE is the native utility tokens of PancakeSwap that are given for free as a reward to users who become LP and take advantage of farming. The role of CAKE as an incentive token in PancakeSwap’s ecosystem creates high sell pressure where most CAKE token holders sell or exchange them for other crypto assets.
What is PancakeSwap (CAKE)
PancakeSwap (CAKE) is a decentralized exchange (DEX) that allows users to exchange various crypto assets without third parties and is non-custodial. That is, all transactions in PancakeSwap occur directly between users and the network does not store user funds while the transaction is in progress. The platform runs on a smart contract built on top of the Binance Smart Chain (BSC). The native crypto asset of PancakeSwap is CAKE.
PancakeSwap is built from the code base of UniSwap, the first and most popular DEX on the Ethereum network. Therefore, its experience is similar to UniSwap but added with various modifications to make it feel different. PancakeSwap is one part of the new wave of DeFi applications following UniSwap.
Read more: What is Decentralized Finance (DeFi)?
According to DeFiLlama, PancakeSwap is one of the largest DEX apps on Binance, with a total value locked (TVL) of $6.18 billion dollars. Even though it’s relatively new, PancakeSwap only has a $1 billion dollars difference from UniSwap’s TVL ($7.41 billion dollars). The platform has managed to attract a large number of users because it has many uses beyond just being a DEX.
History of PancakeSwap
PancakeSwap was created by some anonymous developer at BSC. They successfully launched PancakeSwap in September 2020. This launch coincides with the height of DeFi enthusiasm now known as “DeFi Summer 2020.” These times were marked by network congestion and the price of Ethereum transaction fees becoming very expensive. PancakeSwap took advantage of this opportunity because it offers low transaction fees, fast transaction processes, and lower asset exchange fees than UniSwap.
All these features help PancakeSwap attract a large number of users to its platform. In fact, only 8 months since its launch, PancakeSwap TVL soared to $7.5 billion dollars. Now it is one of the largest DEX in the crypto industry offering a wide range of DeFi products.
How Does PancakeSwap Work?
PancakeSwap is not a blockchain, it is a smart contract built on top of the BSC. BSC itself is a proof-of-stake (PoS) blockchain with Ethereum Virtual Machine (EVM) capabilities that allow easy integration with applications from Ethereum. Furthermore, because it is based on a PoS network, BSC can process transactions quickly at a fairly low cost. This is what makes PancakeSwap better than UniSwap. All transactions can be done quickly without having to worry about network congestion at BSC.
Read more: What is Binance?
PancakeSwap is a DEX that utilizes automated market makers (AMM) technology to match two parties wishing to exchange crypto assets. This AMM system is necessary because PancakeSwap does not use a third party to regulate the exchange of assets between buyer and seller. In an AMM, a crypto asset exchange takes advantage of a user-generated liquidity pool. Users who keep their crypto assets in the liquidity pool will be rewarded with trading fees.
PancakeSwap itself charges a 0.25% transaction fee on each trade, of which 0.17% is distributed to the Liquidity provider, and 0.03% is sent to the platform treasury as revenue.
Read: All information about PancakeSwap can be read here
What Can You Do in PancakeSwap?
The most basic thing you can do in PancakeSwap is swap cryptocurrencies. You can exchange all types of BEP-20 tokens listed on Binance. In addition, you can also add other tokens as long as they comply with the BEP-20 standard. PancakeSwap can process cryptocurrency exchanges instantly with a simple and easy process.
Read more: Difference between BEP2 and BEP20
Become a Liquidity Provider
Liquidity providers (LP) can lock their tokens on a pair of crypto assets (e.g. CAKE-BNB) to earn rewards from PancakeSwap. These rewards come in two forms: LP tokens of your crypto pair and rewards from transaction fees. Rewards from transaction fees in asset pairs are automatically compounded to your positions and can be withdrawn at any time.
💡 One of the risks of becoming an LP is impermanent loss.Impermanent loss is the loss you experience when storing crypto assets in AMM when compared to just holding them in digital wallets (such as MetaMask).
Meanwhile, the LP tokens you get can be used in the farm section of PancakeSwap. From here, PancakeSwap provides various options so you can get additional benefits from several existing schemes. Note that you are now entering DeFi territory.
Farming is the next step after becoming a liquidity provider because you can only do it using LP tokens. Farming can get you a pretty fair profit from doing yield farming on PancakeSwap. You do farming by locking/staking your LP tokens and being rewarded in the form of CAKE tokens. You can only do farming in crypto pairs that match your LP (if you become a CAKE-BNB LP you can farm in CAKE-BNB pairs).
One of the interesting aspects of farming PancakeSwap is the multiplier. The multiplier is the prize weight representing the amount of CAKE reward that each farm gets. For example, the number multiplier 1 means the farm gets 1 CAKE per block, then multiplier 40 means it gets 40 CAKE per block. The multiplier calculation is already included in the displayed APR percentage. The asset pair with the highest APR is CAKE-BNB because it also plays a role in providing liquidity for the entire network.
The next step when you have earned CAKE from LP and farming is staking in the Syrup Pool. Unlike the usual staking, you can also use CAKE to get other tokens with a fairly high APR. Staking gives you the option of getting additional benefits from PancakeSwap and also helps with network security. In addition, all CAKE that you get from staking will be automatically compounded because it can be withdrawn at any time without being locked.
Enter the PancakeSwap Lottery
Finally, one of the unique features of PancakeSwap that distinguishes it from DEX applications such as UniSwap is that they also developed game-like financial products, making it more appealing for its users. One of them is the lottery. You need to use 1 CAKE as a ticket to enter the lottery. CAKE used to purchase tickets will be entered into the lottery prize pool. For now, there are four random numbers on each lottery ticket. During the draw, as long as the lottery ticket matches at least two numbers in the correct order, the user will win a prize. The current lottery prize (25 April 2022) is 20,037 CAKE. Furthermore, in every round of the lottery, a certain amount of CAKE will always be burned and this round will burn 4,000 CAKE.
What makes PancakeSwap unique?
- 🏎️ Transaction fees and speed: The Binance Smart Chain (BSC) network guarantees a fast and inexpensive transaction process.
- 🌐 Diverse products: PancakeSwap is not an ordinary DEX that only offers cryptocurrency exchange services. It has various financial products that you can use to get a profit.
- 🎮 Gamification of user experience: Some PancakeSwap products are gamified by utilizing game elements such as trading competitions and lotteries.
- 🖼️ NFT PancakeSwap Collection: PancakeSwap has a wide variety of special NFT collections in a digital marketplace integrated on the PancakeSwap platform. You can buy this collection normally or get it for free at special events.
CAKE as investment
CAKE is the native crypto asset from PancakeSwap that functions as a governance and utility token. Looking at the price chart, we can see that CAKE has been experiencing a downward trend since September 2021 after reaching its highest price in May. This decline is likely due to the bad condition of the crypto market and the inflationary nature of the CAKE token. The CAKE token is a crypto asset that is given to users as an incentive for farming. Therefore, this naturally creates a selling pressure where most of the owners immediately sell or exchange it for other assets.
With the CAKE token still on a downward trend since September 2021, you need to be careful before buying the token. However, you can still benefit from using the platform. PancakeSwap has also become one of the largest DEX protocols today and the platform has been proven safe to use. Even so, you need to know the risk of yield farming and liquidity providing before trying it. With its simple appearance, PancakeSwap is user-friendly and easy to use. Remember, always do your own research before buying cryptocurrencies or using a DEX app like PancakeSwap.
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- Jerry Zhang, PancakeSwap: Not Just Another Uniswap Fork, Messari, accessed on 20 April 2022
- Mira Christanto, Exploring the Binance Smart Chain Ecosystem, Messari, accessed on 20 April 2022.
- What Is Pancakeswap?, Shrimpy, accessed on 21 April 2022
- Andrew Heyward, What is PancakeSwap? How to Use the Binance Smart Chain DEX, Decrypt, accessed on 22 April 2022.