PancakeSwap

What is PancakeSwap (CAKE)?

PancakeSwap is a permissionless, decentralized, open-source trading protocol called an automated market maker (AMM). It allows users to exchange one crypto asset for another on the blockchain.

PancakeSwap is one of the biggest decentralized exchanges (DEX) of its type in the blockchain industry. It’s by far the largest on the BNB Smart Chain, where it operates. On this blockchain, PancakeSwap allows users to create liquidity pools and swap between different BEP20 standard tokens.

PancakeSwap fulfills a role integral to decentralized finance (DeFi). Holders of various BEP20 tokens can put them to work and earn via providing liquidity, fees, staking liquidity provider tokens, and receiving and using CAKE tokens.

Many of PancakeSwap’s processes and much of its nomenclature revolve around pancakes. PancakeSwap developers are called chefs, the native token is called CAKE, it has “syrup” pools, and so on.

What is a DEX?

A decentralized exchange, or DEX, allows users to exchange tokens or currencies without the need for trusted third parties. Those third parties are often centralized trading facilitators, brokers, market makers, or clearing houses.

Trading traditional assets, such as stocks, typically involves many third parties, all of whom need to carry out their contractual obligations.

Trading of cryptocurrency tokens can also involve centralized entities. It’s often a cryptocurrency exchange that plays some or all of the roles required, such as the provision of liquidity.

However, users who do not wish to trust such centralized entities may instead use a DEX. DEXes rely on code and smart contracts that are open source and can be publicly audited.

Given this transparency, all of the code’s functionality is known to the user before any interaction. This means that the user chooses to trust the code rather than any for-profit, often self-regulated corporations or organizations (SRO). Most of these SROs have opaque processes designed for their own benefit rather than that of the user.

For example, Payment For Order Flow (PFOF), which is touted by many stock brokers, has recently come under the public spotlight for its impact on customers. PFOF was invented by late Ponzi schemer and convicted Wall Street titan, Bernie Madoff. Market makers like Citadel Securities fork out billions of dollars annually on the practice.

When Was PancakeSwap Launched?

PancakeSwap was launched in September 2020 and is a fork of SushiSwap, which itself was a fork of Uniswap, the leading Ethereum DEX.

PancakeSwap shot to prominence following its launch thanks to deploying on BNB Smart Chain. This choice allowed PancakeSwap to offer users much faster and cheaper transactions. That was particularly useful because Ethereum, at the time, was suffering from major congestion and high fees thanks to the DeFi boom.

On top of the drastically reduced network fees of BSC, PancakeSwap also undercut the industry standard swap fee of 0.3% by offering swaps for a fee of just 0.2%.

Thanks to this low-fee model operating on a cheaper network, PancakeSwap rose to prominence quickly and began competing with industry leader Uniswap.

Who are the Founders of PancakeSwap?

PancakeSwap was founded by an anonymous group of developers. The team working on PancakeSwap are referred to as “chefs,” within the analogy of the protocol being worked on in a “kitchen.”

However, the PancakeSwap protocol is fully open-source and open for public audit. It has also been audited by blockchain security firms, including Certik and Slowmist.

How Does PancakeSwap Work?

PancakeSwap’s main service, as its name implies, is that of a DEX where users can swap a BEP20 asset they hold for another BEP20 token.

This trading is carried out without traditional order books. Instead, it involves leveraging liquidity pools created by other users. These users deposit their tokens into pools to earn a return on them rather than simply holding them. These users are called liquidity providers (LPs).

These liquidity pools replace the order book when trades are made. On AMM platforms like PancakeSwap, traders trade their tokens against the liquidity pools, with their prices being determined by a mathematical formula and maintained by arbitrage.

Liquidity providers who deposit their funds into a liquidity pool earn fees from trading and are credited with FLIP tokens. These tokens can be used to redeem their share of the pool whenever they choose. However, you can also use FLIP to participate in yield farming, depositing FLIP to earn CAKE tokens.

CAKE, the native token of PancakeSwap, can also be deposited in Syrup pools. Users do this while choosing between flexible and fixed-term staking. They also decide whether they want to receive more CAKE tokens as rewards or opt for IFO tokens instead.

IFO, or Initial Farm Offering, is a way to launch a project by using a yield farm to raise initial capital instead of opting for an Initial Dex Offering, Initial Exchange Offering, or Initial Coin Offering.

While liquidity providers are significantly incentivized via this multi-layered reward structure, there are risks to providing liquidity and yield farming. One of the most prominent risks is impermanent loss.

What is Impermanent Loss?

Impermanent loss is one of the major risks that contributors to a liquidity pool face.

When contributing to an LP, assets are provided in a certain ratio. However, many assets, especially crypto assets, are volatile.

When one of the paired assets’ value changes on an external venue (such as a centralized exchange), arbitrage traders take advantage. They do this by buying up the same asset from the pool until its price equals what the exchange is offering.

As this shift is taking place, the protocol adjusts the liquidity provider’s assets to maintain the original provision ratio. That means that the provider has experienced a notional loss by missing out on the asset’s rally. Instead, they could’ve simply held the asset.

However, this loss is not realized until and unless they exit the protocol and withdraw liquidity. If they keep providing liquidity, volatility on the other side could see the losses recouped, with even appreciation of both assets in the perfect scenario.

As such, one of the key decisions when considering becoming a liquidity provider is whether the fees earned by providing liquidity outweigh the risk of impermanent loss via volatility.

Liquidity providers must determine whether simply holding an asset might be more worthwhile.

What Makes PancakeSwap Unique?

PancakeSwap is the biggest decentralized exchange on the BNB Smart Chain and one of the top DEXes in the entire blockchain industry.

It’s well known for its innovative approach to user engagement and product development. Simply swapping tokens and yield farming are only the tip of the iceberg in terms of what the platform offers.

Beyond IFOs and Syrup Pools for CAKE staking, PancakeSwap also has a lottery system, a predictions market, an NFT marketplace and profile system, and perpetual trading.

One of PancakeSwap’s most popular products, the Lottery V2, allows users to win CAKE prizes by buying tickets. Each ticket has a six-number combination, with each number being between 0 and 9. Draws take place every 12 or 36 hours, with a maximum of 100 tickets per purchase, although multiple purchases are allowed.

PancakeSwap’s Lottery V2 uses Chainlink’s implementation of VRF to assure true, secure randomness.

How is the PancakeSwap Network Secured?

PancakeSwap is deployed on the BNB Smart Chain. This means it’s BSC that is responsible for making sure PancakeSwap transactions are all in order.

The Binance Smart Chain is based on Ethereum, being something of an Ethereum fork. Yet, it uses proof-of-staked-authority (PoSA) for consensus.

PoSA is a consensus mechanism that combines the features of proof-of-stake and proof-of-authority. Essentially, there are 21 permissioned validating nodes on the network.

The validators have to lock BNB (the native currency of the BNB Smart Chain) into the chain’s protocol. They are rewarded for behaving according to the protocol and punished by slashing (confiscation of their BNB stake) if they misbehave.

This consensus mechanism makes BNB Smart Chain extremely fast. However, it does somewhat compromise on decentralization when compared with alternatives like Ethereum.

What is the Use of CAKE?

The CAKE token is the native token of the PancakeSwap platform and is central to all its products.

CAKE is primarily used as a reward token given to liquidity providers and lottery winners. It is also used for staking in Syrup pools and acquiring lottery tickets. Participating in IFOs also requires CAKE tokens to be staked.

Finally, CAKE tokens are used in on-chain governance.

Who Controls PancakeSwap?

PancakeSwap is developed by a team of anonymous developers and controlled by its community. PancakeSwap has a voting portal where CAKE holders can vote on proposals.

Proposals are usually put forward by the developers, or Chefs. Still, community proposals can also be submitted, at which point they will be reviewed by the Chefs and then put up for voting.

As of PancakeSwap’s V2 update in May 2022, CAKE tokens are used for boosted governance voting. This is enabled for users employing fixed-term staking.

How Much Is CAKE In Circulation?

CAKE has a current circulating supply of over 143 million CAKE tokens, with a maximum supply of 750 million CAKE defined by its V2 update in May 2022.

With three years of emissions from the V2 update forming a runway, the PancakeSwap Chefs are aiming to implement sustainable and effective ways to reduce emissions. The eventual goal is for PancakeSwap to be emissions neutral or even deflationary.

How Do You Buy CAKE?

PancakeSwap is one of the top decentralized exchanges, so perhaps the best place to buy CAKE is the PancakeSwap platform.

However, if you’re looking to buy CAKE using fiat currency or cryptocurrencies like Bitcoin, you may have to use a centralized exchange (CEX). Many CEX platforms offer CAKE trading various fiat currencies, stablecoins, and other cryptocurrencies.

Is It Possible to Buy PancakeSwap Instantly?

BNB Smart Chain processes transactions extremely fast, so PancakeSwap is renowned as a quick, easy-to-use DEX. As long as network congestion isn’t extraordinarily high, you can expect transactions and other operations on PancakeSwap to be completed within seconds.

Buying CAKE on an exchange is fast, too, although withdrawing cryptocurrency off the exchange and into your own wallet isn’t always the quickest process. Some exchanges need to run KYC (Know Your Customer) and AML (Anti-Money Laundering) measures before releasing the transaction. Due to this, the process could take a while.

How Do You Store CAKE?

CAKE can be stored in any BEP20-compatible wallet, such as Metamask and TrustWallet. These wallets then allow you to connect directly to PancakeSwap and perform various operations like swapping, staking, and voting.

You can store CAKE on a centralized exchange platform and even earn some kind of passive income by “staking” your CAKE. Yet, you won’t be able to connect to PancakeSwap’s voting portal and exercise your governance rights using your exchange account.

Worse, centralized exchanges are custodians, so the voting power of the CAKE tokens you paid for is retained by the exchange. Given that these centralized exchanges are competing with DEXes like PancakeSwap, that may not be in the best interests of PancakeSwap as a protocol or your CAKE investment.

PancakeSwap Energy Consumption

The proof-of-work consensus mechanism has received a lot of criticism for its energy usage. Some of that criticism may be justified, as it requires as many computers as possible to dedicate their power to securing the network.

However, newer blockchains tend to use less energy-hungry mechanisms. Binance Smart Chain, for example, uses proof-of-staked-authority, which involves only 21 validators. This is relatively centralized, but it also means a very low energy requirement for the chain as a whole.

Since PancakeSwap accounts for only a portion of the transactions on BSC, it can’t be said to consume a significant amount of energy at all as a protocol.

Is CAKE a Good Investment?

PancakeSwap is a big name in blockchain and is more powerful still in the realm of decentralized exchanges and DeFi.

Holding CAKE tokens to play a part in the governance of such a critical protocol might be good enough for some. Still, CAKE has additional utility in lotteries and staking for IFOs.

Fixed-term staking is encouraged by increased or boosted governance, staking yields, and IFO benefits. It also has the virtuous cycle effect of also tightening circulating supply as tokens lock for up to 52 weeks.

PancakeSwap Chefs are always looking to make the tokenomics of CAKE more attractive and give the token more utility. Thanks to this, even more products and services revolving around the Cake token may emerge.

However, there are risks as well. Decentralized finance is a threat to the current financial system. DeFi allows small investors to put their assets to work, generating returns that the financial giants very much prefer to keep for themselves. As such, the threat of regulation is always on the horizon.

Wall Street continues to pile into cryptocurrency while high returns remain. Yet, it’s also evident that well-capitalized entities are always on the attack, as seen with the Terra Luna collapse in 2022.