All you Need to Know about PancakeSwap
13.05.2021 | 6 min read
DeFi exchanges are all the rage in the cryptocurrency sphere of 2021. It would be unjust to not talk about the de facto leader in the Binance Smart Chain-based DEX (Decentralized Exchange) and another food-themed DeFi protocol, PancakeSwap. Do you like pancakes?
PancakeSwap is a BSC-based alternative to the ETH-based UniSwap DEX, and if you are looking for a quick dive into BSC and want to know how it works, we've got you covered, too. So PancakeSwap is primarily a decentralized exchange platform for purchasing tokens based on the Binance Smart Chain. Amongst its numerous features, it is the high gas fee of Ethereum that has led to the rise of the cheaper BSC-based alternative.
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Automated Market Maker Model
DEX exchanges like PancakeSwap and UniSwap use the Automated Market Maker (AMM) model. In simple words, it means that you can trade tokens to one another just like Binance or any other centralized exchange. However, a key catch is the non-existence of order books, wherein you trade against a liquidity pool. These pools are referred to as Liquidity Provider pools filled by users who deposit them in return for their initial investment plus a share of trading fees in the form of Liquidity Provider (LP) tokens.
The newly launched tokens often lock some percentage of the tokens in the PancakeSwap liquidity pool to continue to offer liquidity to their highly volatile ventures and maintain the price floor.
Swap is the term used to describe trades in a DEX to differentiate from the CEX terminology of trade. However, the concept is the same. Swaps are used to exchange one token (BSC-based in the case of PancakeSwap) to another. A simple example would be to exchange USDT for ADA. However, unlike CEX, a minimal transaction fee is always charged in BNB instead of trading fees. It is advised to conduct transactions that hold more monetary value than the transaction charges.
The most popular pairs of transactions on PancakeSwap include swapping from BNB to PancakeSwap’s native token CAKE. Swapping from BNB allows keeping a single source for both swapping and transaction fees, and thus more manageable. This technique has played a key role in the popularity and the pump around the price of BNB.
Liquidity Pools and Farms
Both the liquidity pools and farms are means to earn surplus in addition to your initial investment. However, they differ in working and a key understanding of making the best gains possible.
Pools are similar to staking in a CEX — pledge your tokens for proof-of-stake and make money while you sleep. Similar to swapping, transaction fees are charged in BNB. However, PancakeSwap promotes the staking of its native token, CAKE, to earn rewards in numerous available tokens.
Farms, on the other hand, offer to stake your Liquidity Provider (LP) tokens. These tokens, when staked, offer liquidity to the pair you have pledged. In return, you receive rewards (a portion of the transaction fee), often in terms of CAKE. The most popular pair is the CAKE-BNB LP; however, you may explore numerous others such as BETH-ETH and TWT-BNB, among others, depending on the APY.
As the name suggests, Lottery is a risky game of luck to earn additional tokens. One can participate by purchasing a ticket worth 10 CAKE. Each ticket has a random four-digit combination of numbers from one to fourteen, such as 13-8-2-3. If your ticket matches the exact number, you win the jackpot worth 50% of the entire lottery pool. You may also earn smaller jackpots if two or more numbers on your ticket match the winning lottery in order.
Please note that due to the surge in the price of CAKE, PancakeSwap is changing the way lottery will work in future. Please refer to the following articlehere for more information.
For those who do not believe in luck, the newly launched Prediction Beta might be more suitable. Similar to options trading, you commit a custom amount of BNB and predict if the value of a token will go up or down. If your prediction is correct, you win additional rewards. If you lose, you forego your committed token.
Please note that the feature is currently in Beta, and there might be changes to how Prediction works in the future.
Initial Farm Offering (IFO) is similar to the more popular IDO (Initial DEX Offering) and Initial Coin Offering (ICO). It is a way of getting hands-on with the newly launched tokens through the power of yield farming. The way it works is that you give your LP tokens, you receive your project tokens and the project receives CAKE worth 50% of these LP tokens.
Collectibles are carefully curated NFTs from PancakeSwap to buy digital assets. Their current collection boasts a range of animations or you may choose to create your avatar in exchange for CAKEs.
The collection is expected to have new forms of NFTs. Binance has announced the launch of its NFT marketplace in June 2021 and considering PancakeSwap’s BSC backing and the hype around NFTs, new collections shall be in place soon.
Team Battle is a trading competition where teams are defined with the participating wallets. Eligible trading pairs are announced and the higher the number of trades of a team is eligible, the more the chances of winning, and therefore, additional token rewards. Quite simple, no?
PancakeSwap governance is based on voting from its native token CAKE holders. The core team proposes solutions on which the users vote. If more votes are in support, the proposal is implemented.
To be eligible for voting, one should have CAKE in their wallet, staked in a Syrup pool or held CAKE-BNB LP tokens at the time of the snapshot on their voting platform.
V1 vs V2
PancakeSwap was an MVP in Beta until the launch of its V2. PancakeSwap V2 is a contract migration from its older version to introduce new features, scalability, and innovation.
The new features in V2 include a referral program, burn mechanics, auto-compounding in pools, and customizable CAKE mining logic. Currently, for all tokens pre-V2, the liquidity is divided between V1 and V2, whilst the new tokens are encouraged to be liquidated in V2 only.
As of now, it still may be more profitable to purchase some tokens from the V1 liquidity pool. One such instance we have found is the BONFIRE token.
PancakeSwap does not have a quarter-wise roadmap but instead takes the approach of to-do list. Currently, the notable items in the list include a site revamp, community pools, margin trading, and NFT-based gamification.
PancakeSwap aims to be a full-fledged alternative to centralized exchanges and some of the features like fixed-term staking and lending are also being worked upon. You can access the official roadmap here.
PancakeSwap boasts a range of features for crypto traders and enthusiasts alike. Its food-based theme makes it interesting and the Binance Smart Chain integration reduces the cost. If used with calculated risk, the rewards are supreme.