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Tech Deep Dives

What Is PancakeSwap?

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Published on:
July 26, 2021

CoinMarketCap takes a deep dive into an automated market maker that allows its user to exchange tokens available on Binance Smart Chain and earn CAKE passively.

What Is PancakeSwap?

Table of Contents

Despite its comical name, PancakeSwap is no joke. As a platform that regularly clocks in over $100 million in 24-hour trading volume, it’s one of the most popular DApps of all time. 


In less than a year, it has become by far the dominant DEX on Binance Smart Chain, even eclipsing Binance’s own Binance DEX, that can only be considered a meteoric growth and adoption. 


What makes it so special? Find out below. 

What Is PancakeSwap?

By far the most popular decentralized exchange (DEX) on Binance Smart Chain (BSC), PancakeSwap, has become somewhat of a phenomenon in the blockchain space in recent months, thanks to its massive liquidity, wide-ranging feature set, and sizeable user base. 


The platform is designed to allow users to securely trade Binance Coin (BNB) and a massive variety of BEP-20 tokens without relying on centralized services or losing control over their private keys. As a decentralized exchange, all trades on PancakeSwap are automatically executed via smart contracts — completely eliminating counterparty risks. 


Although the team behind PancakeSwap is completely anonymous, the platform has been audited by several prominent blockchain security firms — including Certik and Slowmist. The platform is also completely open-source, since the PancakeSwap website and smart contract code are open to public scrutiny. Nonetheless, it is known that the team consists of more than a dozen members (known as chefs), including two co-leads (Hops and Thumper), and a variety of engineers. 


Since the platform launched in September 2020, it has seen a dramatic growth not only in the number of users and the liquidity of supported assets, but also in the variety of features it offers. Now, PancakeSwap can be considered an entire ecosystem of DeFi tools, all of which are built around the platform’s native utility token — CAKE


What is CAKE?


CAKE, a native utility token of PancakeSwap, is used for a variety of purposes within the growing landscape. Its main functions are yield farming, staking, participating in the PancakeSwap Lottery, and making and voting on governance proposals through the platform's community governance portal.

How Does PancakeSwap Work?

PancakeSwap is a type of DEX known as an automated market maker (AMM). This essentially means that there are no order books, bid/ask system or limit/market orders. 


Instead, users trading on the platform automatically draw liquidity from one or more liquidity pools, which then rebalance after the trade is complete. Trades conducted on an AMM, like PancakeSwap, subtract liquidity from one side of the pool and add liquidity to the other, thereby changing the weights of the assets in that pool and their relative values. 



This liquidity is contributed by users, known as liquidity providers (LPs), who add equal values of both sides of a liquidity pool (e.g. BNB/USDC) to increase the total amount of liquidity available. Users receive LP tokens that represent their share in that particular pool. These tokens need to be returned in order to retrieve their fraction of the pool. In return for providing liquidity, LPs receive a share of the transaction fees generated by any pools they contribute. There is a flat 0.25% transaction fee for makers and takers, most of which is shared among the liquidity providers.

 

As a decentralized application (DApp), PancakeSwap is generally accessed through a supported Web3 wallet, such as MetaMask, TrustWallet, or WalletConnect. Once configured to support Binance Smart Chain, these wallets are used to interact with the PancakeSwap smart contracts via the intuitive PancakeSwap front-end.


The platform is funded by the PancakeSwap treasury, which currently receives 15% of all the trading fees generated. According to the official documentation, funds from the treasury can be used for a variety of purposes related to the upkeep and maintenance of the platform. These include salaries, audits, prizes, bounties, hosting, etc.


Updates on PancakeSwap

Since its launch in 2020, the platform has gone through several upgrades, each of which has seen the addition of new products and features. PancakeSwap upgraded to V2 in April 2021, giving the developers more freedom to improve the future functionality of the platform — such as auto-compounding in syrup pools and adding a referral program. This was subsequently followed by a change in the fee schedule (from 0.2% to 0.25%) with 0.05% of this used to buy CAKE from the public market before burning it to add another deflationary mechanic to the token. 


The chefs behind PancakeSwap don’t currently maintain a concrete roadmap, but there is a public to-do list (without specific dates). Some of the major items on the list include adding fixed-term staking products, lending & borrowing features, and allowing users to earn NFTs by completing tasks and leveling up.

What Makes PancakeSwap Unique?

Built on Binance Smart Chain, PancakeSwap leverages a number of its unique properties to provide an excellent trading experience to end-users. For one, it benefits from extremely low transaction fees and rapid confirmation times — ensuring trades are executed quickly. It also doesn’t generally suffer from displacement attacks like front-running, making it safer to use than some other AMMs on blockchains with a slower block time. 


Beyond this, PancakeSwap also offers an extensive range of secondary features, many of which provide additional utility to CAKE holders. The most prominent of these currently include:


Initial Farm Offerings (IFOs)

Similar to an Initial DEX Offering (IDO), PancakeSwap allows users to purchase the tokens of new early-stage projects before they have their public launch. However, in this case, users exchange their CAKE-BNB liquidity provider (LP) tokens for new project tokens during an Initial Farm Offering (IFO). As part of the process, half of the total funds (the CAKE side of the equation) is burned — adding another deflationary mechanic for the token.


Some of the projects that were launched using this method include Ditto, Soteria, and Hot Cross


Yield Farms

PancakeSwap allows users to earn an additional yield by staking supported liquidity provider (LP) tokens in one of its numerous yield farms. By participating in a yield farm, users earn a CAKE yield on their LP tokens. This is on top of the yields generated through transaction fees. 


The exact APY can vary from farm to farm, but can be as high as several hundred percent. Though users will need to factor potential impermanent losses into their overall yield.


Syrup Pools

Syrup pools are the equivalent of PancakeSwap's simple staking functionality. Through the platform's Syrup pools, users can stake a variety of BEP-20 tokens to earn a yield — either in the form of CAKE or another reward token. 


As with its yield farms, the APY for each pool can vary considerably, and users will need to consider the changing value of their staked assets to calculate their true yield. 


Lottery v2

PancakeSwap is unusual among decentralized exchanges in a sense that it also offers a lottery feature — allowing users to buy lottery tickets to potentially take down a large pot of CAKE. 


The price for a single ticket is around $5 in CAKE at current rates, but users can receive an up to a 4.95% discount by purchasing 100 tickets at once. A total of 40% of the prize pool is allocated to users who match all six numbers on their lottery ticket, with the prize shared equally among winners.


Prediction Markets

PancakeSwap's prediction market tool is a simple feature that allows users to predict whether the price of Binance Coin (BNB) will rise or fall in a 5-minute timeframe. The users pool their funds into a prize pot which is shared among those that correctly predict the direction of the market. Losers forfeit their bet amount. 


NFT Collectibles

In February 2021, PancakeSwap added a new feature known as NFT Profiles, which allows users to choose an NFT profile picture after purchasing one of the available Bunny NFTs. Users with a complete profile will also be able to join a team that will be allowed to participate in special team events to earn rewards. As of July 2021, the most popular team is Syrup Storm.


Community Governance on PancakeSwap

PancakeSwap is partially governed by the community. This means CAKE holders can use PancakeSwap's native voting portal to vote on governance proposals. Some of these will be tabled by the PancakeSwap core team, whereas others are tabled by the community. 


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Author(s)

Daniel Phillips

Cryptocurrencies are all I talk about. Most of the time.

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