A Closer Look at PancakeSwap in 2023
CMC Research

A Closer Look at PancakeSwap in 2023

3 months ago

This report dives into PancakeSwap after its v3 update — covering ultrasound CAKE tokenomics, multichain expansion, new product launches and future outlook for the decentralized exchange.

A Closer Look at PancakeSwap in 2023


The 2023 market for decentralized exchanges is showing healthy signs of consolidation around a few market leaders.
Uniswap (UNI) still leads the rest in terms of total value locked (TVL) and trading volume.  PancakeSwap (CAKE), however, is a household name that has maintained its position as one of the top competitors. Trading volumes for the entire DEX sector are down compared to 2022.
In the face of a sideways market, PancakeSwap managed to grow its total trading volume from Q1 to Q2 2023 by 77%. It has doubled its market share among decentralized exchanges since the release of its V3 version. The expansion to Ethereum and layer-two solutions, new CAKE tokenomics and other product launches have helped PancakeSwap to stay at the forefront of DEX innovation.

This report looks at:

  • PancakeSwap V3
  • PancakeSwap multi-chain expansion
  • PancakeSwap innovation in 2023
  • Ultrasound CAKE tokenomics
  • Roadmap and future outlook for PancakeSwap

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What Is PancakeSwap?

Pancakeswap was originally built on the BNB Chain and allows users to trade tokens without using a centralized exchange. It provides an array of products, such as:
  • An exchange to swap tokens
  • A yield farm to earn rewards
  • Syrup pools to stake CAKE tokens
  • Ethereum liquid staking (wBETH) and simple staking
  • Pancake Protectors game
  • v3 position manager (new feature)
  • A prediction market
  • Initial Farm Offering (IFO) token launches
  • A bridge to bridge CAKE to Ethereum and Aptos
  • A lottery
  • An NFT marketplace
Pancakeswap innovates quickly and ships new products regularly. In April 2023, PancakeSwap voted to transition to a deflationary token model called "Ultrasound CAKE." The protocol passed a proposal called CAKE Tokenomics v2.5 to create a structure combining real yield (no supply impact) and reduced token emissions. Over 102% of minted CAKE is burned weekly. This is intended to provide a multi-year runway for emissions and incentivize locking up CAKE, making the token more valuable long-term.

PancakeSwap has an anonymous team of “Chefs,” working in the PancakeSwap “Kitchen.” The platform is open-source and has been audited by multiple reputable blockchain security firms like Peckshield and Slowmist.

Although the bear market has impacted TVL and trading volume for the protocol, PancakeSwap still boasts an annualized revenue of $27 million, with 42% of CAKE is staked:

What Is PancakeSwap V3?

PancakeSwap V3 introduces several key innovations and features to improve capital efficiency, lower fees for traders, increase earnings for liquidity providers and enhance the overall user experience.

PancakeSwap V3 allows for capital concentration, enabling liquidity providers to focus their capital on specific price ranges rather than distributing it evenly across the entire price range. This concentration of capital where the majority of trading activity occurs can provide up to 4000x higher capital efficiency compared to V2, particularly for stablecoin pools. As a result, liquidity providers can earn significantly more fees on the same amount of liquidity.

Traders also benefit from lower trading fees in V3, as there are now 4 tiers of fees: 0.01%, 0.05%, 0.25% and 1% compared to the fixed 0.25% fee in V2. The tiers cater to the needs of different trading pairs based on expected volatility and trading activity. Concentrating liquidity in active ranges also reduces slippage for traders. V3 also implements a smart router to find the best trading route across V3, V2 and StableSwap pools.

For liquidity providers, the ability to choose fee tiers, customize price ranges, create non-fungible liquidity positions and concentrate capital provides more flexibility and potential to maximize earnings. V3 also introduces active liquidity farming, which rewards users in CAKE tokens when prices fall within the price ranges of their active liquidity positions. Other features include a VIP trading rewards program and position manager for easy single-click deposits.

One of the newest and most innovative features added to PancakeSwap is the Position Manager. It introduces auto-compounding of rewards, thus all fees and rewards earned by the liquidity position are automatically compounded back into the pool. This exponentially grows a provider's position over time through the power of compound interest. Furthermore, the Position Manager handles gas fees and position rebalancing automatically, mitigating the risk of impermanent loss. Providers can supply liquidity in concentrated price bands to maximize fees from high trading volumes and choose strategies optimized for their risk tolerance.

Ultrasound CAKE Tokenomics

In October 2023, PancakeSwap burned over 1.76 million CAKE tokens while only minting 1.42 million new tokens. This resulted in a net reduction of 337K CAKE, reducing total supply by 0.086%.

PancakeSwap has consistently dedicated efforts to transition CAKE to a deflationary token through strategic burning. The exchange has implemented several changes, driving organic trade volumes and activity, resulting in CAKE becoming ultrasound.:

  • Reduced CAKE emissions from 40 per block originally to around 1.8374 per block currently. This is achieved by allocating less CAKE rewards to farms and pools over time.
  • Expected reduction in 750 million max supply cap for CAKE. With current circulation around 388 million and deflationary, CAKE will likely never hit the max cap.
  • Implemented burn mechanisms into various products:
    • 0.001~0.23% of every trade made on V3
    • 0.0575% of every trade made on V2
    • 0.004%~0.016% of every trade made on StableSwap
    • 100% of CAKE sent to the Dev address
    • 100% of CAKE performance fees from IFOs
    • 100% of CAKE spent on Profile Creation and NFT minting
    • 100% of CAKE bid by winners during Farm Auctions
    • 20% of CAKE spent on lottery tickets
    • 20% of all profits from Perpetual Trading
    • 8% of the Pottery prize pot distributed each week
    • 3% of every BNB Prediction markets round is used to buy CAKE for burning
    • 3% of every CAKE Prediction markets round
    • 2% of every yield harvest from all the flexible staking positions in CAKE pool
    • 2% of every NFT sale on the NFT Market is used to buy CAKE for burning
To align incentives and reward loyalty, PancakeSwap also introduced a revenue sharing program. A portion of trading fees is distributed weekly to CAKE stakers proportional to the amount and duration of their staked CAKE. The staked CAKE distributes shares (also known as rCAKE) to users, which are re-calculated based on:
  • The amount of the locked CAKE
  • The remaining lock duration of their locked CAKE rounded down to weeks, and the maximum allowed lock time (52 weeks).

For example, staking 50 CAKE for 10 weeks out of the maximum 52 weeks would yield around 9.61 virtual shares in the revenue sharing pool (rCAKE). This provides CAKE stakers with real yield on their holdings. The longer the lockup, the higher the proportional share of trading fee revenues.

This mechanism of locking CAKE is reminiscent of the Curve Wars and how protocols like Convex Finance reward locking up CRV tokens. There are a few similarities between the two:
  • Both CAKE and CRV are governance tokens that give voting power when locked up for a period of time. Longer lockups grant more voting power.
  • Locking up both tokens provides additional rewards and benefits to holders. For CAKE, benefits include trading fee rebates and boosts to farm yields. For CRV, benefits include increased CRV rewards.
  • Locking creates scarcity and aligns incentives between the protocol and long-term focused users for both tokens.
However, there are a few key differences, where PancakeSwap compares favorably to Curve:
  • CAKE revenue sharing rewards loyal lockers with a portion of platform fees based on lock duration. CRV does not have a similar revenue sharing model.
  • Locked CAKE boosts initial farm offering allocations for their launchpad (IFOs) and farming yields. Locked CRV does not provide these specific benefits, only extra CRV rewards.
  • CRV is integral to Curve's liquidity pools and voting. CAKE is not required for providing liquidity on PancakeSwap.
  • PancakeSwap emission reductions have already put CAKE on a deflationary path. CRV emissions are still inflationary.
While both try to incentivize locking governance tokens, CAKE locking provides more varied benefits like revenue sharing. Thanks to its focus on rewarding the community and long-term development, PancakeSwap looks well-positioned to capture a sizable share of the growth of Ethereum L2 chains.

PancakeSwap’s Multichain Expansion

PancakeSwap has been pursuing a multichain strategy, which has seen the decentralized exchange and the CAKE token launch on different layer-one and layer-two blockchains.

Since the v3 launch at the start of Q2 (April 2023), the monthly volume and market share of PancakeSwap in terms of DEX volume have both increased. Total trading volume in Q2 grew 77% QoQ, while Q3 volume grew 11.2% compared to Q1.

Meanwhile, market share in terms of DEX volume grew 110% from Q1 to Q2, and Q3’s market share grew 92% compared to Q1.

PancakeSwap Monthly Volume

Source: DeFiLlama

Market Share of DEX Volume

Source: TheBlock

The exchange launched on Ethereum in September 2022 and Aptos in October 2022. Several Ethereum L2s, such as Base, opBNB, Arbitrum, Linea, zkSync Era and Polygon zkEVM have been added since.

Source: DeFiLlama

PancakeSwap on Ethereum

PancakeSwap launched on Ethereum in September 2022 and has been steadily increasing its trading volume over the last twelve months:

Source: DeFiLlama

Looking at total value locked, PancakeSwap trails both Uniswap and Sushiswap. However, its Volume-to-TVL ratio equals that of Uniswap, signaling a sustainable growth model and potentially more capital efficiency for the exchange:

Source: DeFiLlama

PancakeSwap on zkSync ERA

zkSync ERA is one of the prime zk-focused layer-two solutions for Ethereum. PancakeSwap has established itself as one of the main decentralized exchanges of this ecosystem. It ranks second for trading volume and fifth for total value locked:

Source: DeFiLlama

Moreover, both metrics have been growing explosively since the launch in July 2023:

Source: https://pancakeswap.finance/info/v3/zksync

PancakeSwap on Base

PancakeSwap launched on Base in August 2023 and has quickly become one of the leading decentralized exchanges of this ecosystem, in terms of trading volume, despite having a relatively lower TVL as compared to Uniswap and Aerodrome.

The total value locked on Base has been growing consistently over the last two months, currently hovering around $2M:

Source: https://pancakeswap.finance/info/v3/base

PancakeSwap on Linea

PancakeSwap is the leading DEX in terms of trading volume on Linea, an EVM-compatible L1 using zk-rollups as a scaling solution:

Source: DeFiLlama

PancakeSwap on Polygon zkEVM

PancakeSwap has quickly established itself as a Top-2 DEX on Polygon zkEVM. Polygon zkEVM is a fledgling ecosystem with comparatively lower trading volumes and TVL. However, it uses zk-rollups as scaling technology, one of the main scaling solutions of next-generation blockchains:

Source: DeFiLlama

PancakeSwap on Arbitrum

PancakeSwap launched on Arbitrum in August 2023 and ranks in the top 20 for both total value locked and trading volume. Due to the entrenched competition on Arbitrum, PancakeSwap did not grow quite as explosively as on Base but has been on a steady growth trajectory:

Source: https://pancakeswap.finance/info/v3/arb

PancakeSwap on opBNB

opBNB is a layer-two chain built on the Optimism tech stack, which scales Binance’s BNB Chain. So far, PancakeSwap is the only decentralized exchange on opBNB, allowing it to capture 100% of the growth of this rapidly expanding ecosystem:

Source: https://pancakeswap.finance/info/v3/opbnb

PancakeSwap New Products

PancakeSwap boasts a rich suite of products for exchange users:

Source: https://docs.pancakeswap.finance/products

Beyond its core exchange and farms, PancakeSwap introduced entirely new products and services in 2023. The launch of Pancake Protectors marked PancakeSwap's first move into blockchain gaming. This PvP game provides an engaging experience with NFT rewards. PancakeSwap also added fiat on-ramps through partners like Moonpay, Mercuryo and Transak. Users can now purchase crypto directly using credit cards, bank transfers and other fiat payment methods.

Other new offerings include Liquid Staking via Synclub and the revival of Farm Auctions, which had been paused. PancakeSwap also introduced a Revenue Sharing program to reward loyal CAKE stakers. Moreover, PancakeSwap's signature yield farming continues to expand. Over 200 new farms were added across multiple chains in 2023. Products like bCAKE v3 help users maximize their yields.

Finally, PancakeSwap boosted its trading experience through integrations that improve execution and reduce costs. Beyond the introduction of PancakeSwap v3, perpetuals received a major v2 update with new features like Degen Mode. Integrating market makers and leveraging Celer Network’s bridging capabilities enable zero-slippage trades on non-BNB Chain pairs. The adoption of Bloxroute's security solution Private RPC aims to protect users from bots and front-running.

Roadmap and Future Outlook

PancakeSwap has an ambitious roadmap focused on enhancing user experience through innovation across multiple aspects of its platform.

In Q4 2023, PancakeSwap launched Position Manager, automating liquidity provision. Users simply deposit assets which are then automatically deployed across pools and farms for yield optimization. This eliminates complex calculations and gas fees incurred by manual management.
PancakeSwap also plans to introduce veCAKE, which allows CAKE holders to vote on governance proposals proportional to their veCAKE balance. This boosts community participation. Voting gauges will also be added so the community can direct CAKE emissions and yields to preferred protocols, similar to the CRV model.

Furthermore, PancakeSwap will bring its entire suite of DEX offerings like trading, yield farming, lottery and others to all its supported chains. This also includes the introduction of multichain gaming.

Other key updates planned:

  • Integrating notifications system: This will enable important alerts and updates to be pushed directly to users via both the PancakeSwap interface and connected wallets.
  • Increasing prediction fees through multichain expansion: PancakeSwap is considering generating greater prediction fees by expanding and attracting users from other chains, to boost CAKE burning.
  • Reducing max supply: PancakeSwap plans to reduce the max supply of CAKE from the current 750 million by the end of the year. The estimated timeline is the end of 2023.
  • Resuming trading competitions: PancakeSwap may resume trading competitions in the future based on market conditions to increase engagement. But current trading rewards are more flexible.
  • Integrating with asset-backed partners: PancakeSwap is exploring partnerships with real world asset backed protocols to attract institutional capital.
  • GameFi Expansion: PancakeSwap is exploring a gaming platform where third party developers can develop and release their multichain games on PancakeSwap.

Longer-term, PancakeSwap aims to be a seamless, user-friendly, and decentralized all-in-one DeFi platform accessible across multiple blockchains. The exchange continues to build and ship innovative products while optimizing tokenomics.

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