PancakeSwap (CAKE): A DEX for the BSC Ecosystem

What Is PancakeSwap?

PancakeSwap is a decentralized exchange (DEX) protocol built on Binance Smart Chain (BSC). Since launching in September 2020 as the first trading platform on the BSC, PancakeSwap has become the largest automated market maker (AMM) on the network as of 2021. The total value locked (TVL) on PancakeSwap rose to $3.76 billion in the summer of 2021, a figure that highlights not just the rapid growth in the popularity of PancakeSwap and similar platforms like BakerySwap, but the viability of BSC as a DeFi-ready blockchain network.

As a DEX platform, PancakeSwap facilitates cryptocurrency trading without a centralized exchange service. Although PancakeSwap resides on the BSC, it has no affiliation with the centralized Binance exchange platform and its team. This dynamic emulates the structure of other popular AMM DEXs like Uniswap, which is built on Ethereum, but operates as a completely independent third-party protocol.

In exploring DEX protocols like PancakeSwap, it's helpful first to understand how AMMs work.

PancakeSwap: An Automated Market Maker (AMM)

PancakeSwap utilizes AMM infrastructure to facilitate crypto trades on its platform. Through the use of AMM functionality, PancakeSwap can operate without intermediaries in a "trustless" environment. As a result, users can trade digital assets without the use of order books and eschew the custodial nature of centralized exchanges. More specifically, instead of matching buyers and sellers using order books, AMMs utilize what are called liquidity pools. An AMM operates as a collection of liquidity pools composed of two assets. Each pool provides constant feedback on the price differential between two assets based on the constant product formula (x * y = k). This formula helps maintain a balance between assets in a liquidity pool to accommodate a relative market price. Regardless of the liquidity pool in question, this constant product formula prevails. Liquidity pools are a crucial element of the AMM structure, and thus of DEXs and DeFi as a whole.

Additionally, while BSC utilizes the BEP-20 token standard built for use on Binance Smart Chain, PancakeSwap prioritizes interoperability by supporting wrapped token deposits. As a result, a liquidity pool can include digital assets like ether (ETH) and bitcoin (BTC) alongside BNB and BUSD. However, in contrast to AMMs like Uniswap, PancakeSwap leverages the Centralized Decentralized Finance (CeDeFi) infrastructure that underpins BSC — designed so that users can experience consistent, low-cost transactions. In short, CeDeFi exemplifies platforms that integrate both centralized and decentralized architecture to improve the user experience.

Liquidity Provider (LP) Tokens and CAKE Token Farming

When traders stake their tokens in PancakeSwap liquidity pools, they receive LP tokens in return. These tokens represent their share of the respective pool and its proportional trading fees. To materialize their rewards, liquidity providers can harvest their LP tokens by depositing them to the appropriate pool. Similar to other AMMs, the PancakeSwap exchange protocol incentivizes deposits by issuing rewards. As users deposit more liquidity to a pool, it becomes more resistant to external market pressures, supporting broader market stability and platform valuation.

Although liquidity providers can choose to harvest their LP tokens to earn rewards, they can also leverage yield farming to amplify their returns. To achieve this, liquidity providers can stake their LP tokens to earn CAKE, the PancakeSwap governance token. After connecting a non-custodial wallet like MetaMask or TrustWallet to the PancakeSwap platform, users must confirm how many LP tokens they wish to stake. Once complete, the platform will display CAKE token earnings.

PancakeSwap Syrup Pools

PancakeSwap users can further amplify their returns by staking their CAKE token rewards in Syrup Pools. In contrast to liquidity pools, Syrup Pools don't function as dynamic markets. Instead, they hold a single token that earns a compounded annual percentage rate (APR). Perhaps most beneficial to traders is the ability to stake CAKE to earn more CAKE. During this process, traders can choose to stake in the Auto CAKE or Manual CAKE Syrup Pool.

Auto CAKE: This pool automatically compounds rewards, which means that CAKE crypto rewards are automatically harvested and re-invested in the same pool.

Manual CAKE: This pool doesn't automatically compound rewards, which means traders need to manually harvest CAKE token rewards to compound their earnings.

In addition to these popular Syrup Pools, the platform allows users to stake CAKE to earn dozens of other digital assets. Users can harvest Farm and Syrup Pool rewards together or separately depending on their unique farming strategies to simplify reward collection.

The PancakeSwap Ecosystem

In addition to delivering trading, farming, and staking services, the PancakeSwap ecosystem also includes a prediction market, lottery, non-fungible token (NFT) market, and an Initial Farming Offering (IFO) framework.

PancakeSwap Crypto Prediction Markets

The most recent gaming experience on the PancakeSwap platform comes in the form of a prediction market. Similar to prediction markets found on Augur, PancakeSwap enables users to stake on the outcome of future events, albeit in a simplified context. For example, a prediction market might pose the question: Will the price of BNB go up or down from the previous trading day?

If you enter an “UP” position, and the BNB market price is higher than the “Locked Price” at the end of trading, you win — but if it’s lower, you lose.

If you enter a “DOWN” position, and the BNB market price is higher than the “Locked Price” at the end of trading, you lose — but if it’s lower, you win.

The PancakeSwap Lottery

The PancakeSwap lottery is another way users can engage with the platform. Here’s how it works:

In exchange for 10 CAKE tokens, users receive a single ticket that includes a random four-digit combination of numbers between 1 and 14. As with many other lotteries, numbers can be chosen at random or manually. All ticket numbers must appear in the same order as the winning ticket to win the lottery jackpot (50% of the entire lottery pool). Even if ticket holders don't win the jackpot, they can still win partial rewards if two or more of their numbers are in the same position as the winning ticket numbers.

Non-Fungible Token (NFT) Collectibles on the PancakeSwap Exchange

You can also purchase or win collectible bunny-themed NFTs on the PancakeSwap DEX. Once issued, these NFTs can be held as collector's items or sold for the CAKE value they represent. In addition, the platform regularly announces opportunities to register for NFT contests.

PancakeSwap’s Initial Farm Offerings (IFOs)

Initial Farm Offerings (IFOs) can help new projects to get their tokens into the hands of users through yield farming. PancakeSwap facilitates this process by requiring that LP tokens issued from the respective staking pool are held on the protocol to gain access to a token sale. This dynamic generates farming rewards for liquidity providers and incentivizes the creation of initial token liquidity pools.

The Future of the PancakeSwap Crypto Ecosystem

Although PancakeSwap operates similarly to other AMMs, the platform is unique in that it resides on the BSC. As a result, the DEX protocol aims to support more predictable and lower-cost transactions than its Ethereum-built counterpart platforms. However, the reliance on CeDeFi has also drawn criticism from some in the crypto community who are suspicious of centralization, as well from some who are unsure of the long-term reliability of this recently developed technology. Regardless of the protocol's underlying mechanisms, it's apparent that PancakeSwap has become a crucial component of the BSC ecosystem, and a noteworthy challenger to Uniswap in the wider DEX ecosystem.

As 2021’s largest AMM project on BSC, PancakeSwap has seen exponential growth alongside growing interest in decentralized finance (DeFi). In response, the project continues to build out functionality that aims to engage a growing number of users. Although Ethereum continues to support a preponderance of DeFi protocols, the warm reception of the BSC-reliant PancakeSwap suggests innovation will continue to spread across alternative blockchain networks.