For yield farming and atomic swaps, do you prefer sushi, pancake, or a unicorn on steroids?
If you are active in decentralized finance (DeFi), you already know that we were referring to automated market maker (AMM) protocols above.
While they have rather funny (or weird) names, SushiSwap, Uniswap, and PancakeSwap have become vital players in DeFi, allowing users to swap tokens without intermediaries and earn a passive income via yield farming.
As we have already explored Uniswap and SushiSwap on AAX Academy, today we will look into PancakeSwap, the flagship AMM protocol of Binance Smart Chain (BSC), the increasingly centralized yet highly scalable blockchain platform competing with Ethereum.
What Is PancakeSwap and How Is it Different From Uniswap?
In fact, PancakeSwap is among the most widely used solutions in the whole DeFi industry, with the project featuring an over 300,000 large with an $877 million daily volume (as of May 24).
Just like SushiSwap, PancakeSwap is also a food-themed clone of the Ethereum-based Uniswap, the leading AMM protocol and decentralized exchange (DEX) on the market.
SushiSwap and PancakeSwap are also alike in terms of their teams as both DeFi protocols started out with anonymous team members (which has now changed for Sushi when a new team has taken over the project).
While the identities of PancakeSwap team members are hidden, we know that some of them are ex Binance employees (based on a blog post by the project). There are also certain rumors on Reddit and other social media platforms that Pancake is run by not former but current Binance employees, claiming that the project is fully managed by the crypto exchange.
However, despite the code similarities and the anonymous development team, PancakeSwap is more than just being a simply Uniswap clone.
First, while it features much fewer token pairs than its competitors, PancakeSwap seeks to provide a viable solution to one of DeFi’s most-burning problems, which is Ethereum’s high gas fees.
Due to Ethereum’s limited scalability, gas fees surge at record high levels when the network experiences increased usage.
And even now, when gas fees have fallen significantly due to the recent market crash, a simple token swap on Uniswap costs nearly $27 on average, according to Etherscan’s data.
While this transaction fee is suitable for larger amounts, it removes the ability from users to exchange small amounts of coins on Ethereum-based on-chain DEXs.
On the other hand, using the same methodology as Etherescan (200,000 gas used for token swaps) and calculating with the standard BSC gas price of 10 gwei, swapping two tokens on PancakeSwap is expected to cost around $0.58 in gas fees (BNB is standing at $290) at the time of writing this article.
For that reason, PancakeSwap leverages BSC’s high scalability to achieve inexpensive token swaps and offer yield farming opportunities without the high gas costs of Ethereum.
In addition to featuring lower fees than its Ethereum-based competitors, Pancake also introduces a gamified DeFi experience via lotteries and team battles. At the same time, the project introduced numerous new features since its launch, such as the staking of the native CAKE token, Initial Farm Offerings (IFOs), non-fungible token (NFT) collectibles, and a beta prediction market.
For these reasons, we can safely conclude that, despite it shares a very similar source code with Uniswap, PancakeSwap is a feature-rich DeFi solution instead of being a simple copycat project.
How Does PancakeSwap Work?
By now, you have learned what PancakeSwap is and how it is different from other AMM protocols like Uniswap and SushiSwap.
Now, let’s take a more in-depth look at how Pancake works by exploring its core functionalities and features.
AMM and DEX
As mentioned earlier, PancakeSwap utilizes the same AMM model as other large DeFi DEXs.
Simply put, AMM is a model modern decentralized exchanges in DeFi utilize to offer users smart contract-powered token swaps without intermediaries. Compared to early versions of DEXs, AMMs are much more efficient as they eliminate the liquidity issues of their predecessors.
Furthermore, AMMs replace centralized order matching via order books with on-chain liquidity pools that are pre-funded by market participants for both assets of a trading pair. While this allows users to swap tokens with increased liquidity as well as without intermediaries in a decentralized way, liquidity providers (LPs) are compensated for their support by earning trading fees and receiving the native tokens of AMM protocols (if applicable).
For that reason, in addition to operating a DEX, an AMM provides excellent yield farming opportunities for users while incentivizing LPs to supply more liquidity to pools.
Furthermore, like other DeFi solutions, AMMs don’t have custody of your funds. Instead, you connect a compatible wallet to the platform, and smart contracts will take care of your funds while trading.
However, since transactions take place on the chain (or on a layer-two scalability solution like Polygon or the OMG Network), trades will involve gas costs along with trading fees. Although, as mentioned in the previous section, gas prices are very low on Pancake due to BSC’s high scalability.
For its DEX solution, PancakeSwap charges a 0.2% trading fee for every token swap, with 0.17% going to LP providers and 0.03% sent to the PancakeSwap Treasury, a fund responsible for maintaining the development and operation of the platform (mostly via CAKE buybacks and burns).
Unlike SushiSwap and Uniswap, PancakeSwap allows users to only trade between BEP-20 tokens on the Binance Smart Chain. For that reason, it features a smaller variety of coins than its competitors.
Farms and Syrup Pools
In addition to earning a portion of the trading fees by supplying liquidity to pools, providers can also put their LP tokens into work to increase their revenue on Pancake.
LP tokens represent a liquidity provider’s share in a pool in which he contributes tokens for a trading pair (e.g., 1 BNB and 290 BUSD).
To increase your rewards, you can stake your LP tokens on the PancakeSwap Farm. For all pools, the platform distributes yield farming rewards for users in CAKE, the native token of the DeFi project.
Next to each farm, you can check the multiplier, representing the CAKE tokens received after each block (e.g., a 30x multiplier means that farmers will be compensated 30 CAKE per block in the pool).
In addition to Farm, PancakeSwap users can also take advantage of Syrup pools.
The main difference between the two solutions is that you don’t need any LP tokens to earn a passive income via Syrup pools. Instead, you simply stake CAKE to earn rewards. Based on the pool you choose, you can earn rewards in CAKE or the native tokens of other emerging BSC projects.
In exchange for staking CAKE, you will receive SYRUP tokens, representing the amount of CAKE you have staked in a pool with a 1:1 peg between the two tokens.
To claim your rewards, you need to utilize your SYRUP to release your locked CAKE tokens.
Initial Farm Offerings (IFOs)
Initial Farm Offerings (IFOs) represent token sales on the PancakeSwap platform that allow new BSC projects to raise funds from contributors.
However, unlike in an Initial Coin Offering (ICO) or an Initial Exchange Offering (IEO), contributors on PancakeSwap don’t outright purchase the tokens of projects.
Instead, to participate in an IFO, you must provide liquidity in the CAKE-BNB pool to get LP tokens. After that, you will commit your CAKE-BNB LP tokens to purchase a project’s cryptocurrency sold during the IFO.
Upon successfully reaching the hard cap of an IFO, PancakeSwap converts the LP tokens, distributes the BNB to the project, and burns all CAKE.
Lottery, Team Battles, and NFTs
PancakeSwap aims to gamify its platform to attract new users and increase engagement.
To achieve that, the project has introduced multiple solutions. One is a decentralized lottery service, in which participants purchase tickets for CAKE (formerly, the price was 1 CAKE per ticket, which is soon updated to $1 per ticket), with each ticket including four randomly generated numbers.
The CAKE users spent on tickets is moved to the pool – along with a 20,000 CAKE injection every two days –, and will be distributed to winners based on whether they managed to match the numbers in the exact same order.
While jackpot winners (who matched all four numbers in the exact same order) receive 50% of the pool rewards (or split if there is more than one winner), users with three and two exact order matches get 20% and 10% of the coins, respectively.
The remaining 20% of CAKE is burnt on all occasions, with an additional 20% burnt in case no one has three exact order matches.
In addition to lotteries, the AMM protocol gamifies its platform by allowing users to create profiles and join teams. By joining a group, you can participate in different promotions and team battles to compete with others and earn extra rewards.
Furthermore, you can earn PancakeSwap NFTs by creating a profile and participating in various activities on the platform.
PancakeSwap has recently introduced its prediction market service in beta that allows users to bet on various events and earn potential rewards by locking their tokens up on the platform.
For example, if a user predicts that CAKE’s price would go up, he locks his tokens in a smart contract. If he was right and the final CAKE price is higher than the initial value of the coins, the user will be able to claim his rewards.
That said, PancakeSwap has temporarily paused its prediction markets due to an error. However, the service is expected to go live again when the bug gets fixed.
What Is CAKE?
CAKE is the native cryptocurrency of the PancakeSwap platform that is based on the BEP-20 Binance Smart Chain standard.
CAKE’s main utilities include:
- Participating in governance by voting on upgrades and other important matters concerning the future of the project.
- Rewarding users for participating in yield farming and staking.
- CAKE is also utilized for lotteries, prediction markets, and IFOs.
While CAKE has no maximum supply, the project regularly burns tokens with the goal to reduce inflation and preserve a long-term price appreciation.
Due to PancakeSwap’s rapidly surging popularity, CAKE features the 42nd rank among all cryptocurrencies (by market cap).
Launched last September, CAKE quickly entered into an uptrend. However, the native token of the BSC-based AMM realized the most growth in 2021. Since January 1’s $0.62, CAKE surged to $15.58 by May 24, achieving an over 2,400% ROI in 2021.
PancakeSwap: the AMM Powering Binance Smart Chain’s DeFi Ecosystem
Despite featuring an anonymous team and copying most of Uniswap’s source code for its launch, PancakeSwap has become one of the leading AMMs in the DeFi space.
Taking advantage of Binance Smart Chain’s high scalability, PancakeSwap provides a viable alternative for users seeking to avoid Ethereum’s high gas costs.
Furthermore, the cryptocurrency project introduced a multitude of features on its platform since its launch – including lotteries, Syrup pools, prediction markets, IFOs, and team battles –, which may help PancakeSwap attract more users from its competitors in the future (even when Ethereum fixes its scalability issues).