PancakeSwap or CAKE is yet another peculiar, food-themed token dominating the crypto space. More specifically, the project is one of the leaders in the decentralized exchange industry despite only being less than a year old.
We can easily attribute its relatively swift success to the Binance Smart Chain (BSC), the distributed ledger powering it. As the name suggests, the Binance Smart Chain is a fourth-generation blockchain created by Binance, currently the largest centralized exchange (CEX) by trading volume globally.
Despite only being less than a year old, having been launched in September 2020, CAKE is now the 34th most traded cryptocurrency at the time of writing. As of 15 May 2021, each token is worth $30.28 with a market cap of approximately $5.3 billion.
Like several digital currency projects, developers behind PancakeSwap remain anonymous. What we know is the creation coincided with the launch of the Binance Smart Chain. The latter was proposed as a better version of the Binance Chain, Binance’s first blockchain launched in April 2019.
As with most blockchains, scalability, interoperability, and smart contract integration issues still exist. BSC aims to solve these problems. According to Binance, the existence of BSC was also for another established blockchain to compete with and complement the Ethereum Virtual Machine.
How does PancakeSwap work?
It’s beneficial to briefly distinguish that PancakeSwap is the decentralized exchange (DEX) facilitating and swapping BSC or BEP20 tokens, which is one of its core functions. Like Ethereum’s ERC20, BEP20 is the technical standard developers use to create dApps or decentralized applications on the BSC blockchain.
On the other hand, the exchange has its own utility token, CAKE. So, what are the main differences between a DEX and CEX?
There are several distinctions between the two, but at its core, it is how each creates liquidity. Centralized exchange market makers provide their own liquidity through an order book, while the decentralized version utilizes the AMM (automated market maker) model through smart contracts.
AMMs use a formulaic pricing algorithm to create markets between users on a particular exchange without relying on actual liquid providers as a CEX would. In simpler terms, traders themselves become liquidity providers (LPs) or market makers.
Each market in the exchange has a designated liquidity pool (of which there are 69) consisting of all the deposited funds provided by the users. For instance, if someone wanted to trade ETH/BNB (Ethereum/Binance Coin), a pool of traders exists with each token for swapping in the entire platform.
This applies to every other instrument. Fortunately, there is an incentive for providing this much-needed liquidity through the process of staking.
As with any exchange, PancakeSwap’s utility token is CAKE, which is what users stake to receive more CAKE or other BEP20 coins at various annual percentage yield rates. Additionally, staking in SYRUP pools offers even higher yields ranging from 45% to 275%.
Staking is fundamentally a mechanism for confirming transactions and creating new blocks on a blockchain. Instead of traditional mining relying on expensive advanced computers, staking does not involve any physical equipment.
In the former, the reward system is built to reward miners with the highest hash rate. With staking, the blockchain automatically rewards new tokens to those with the largest stake. On PancakeSwap, locking tokens provides liquidity and earning passive income by receiving new coins.
These attributes are one of the primary reasons why staking is favored by many over mining. For investors, it is an excellent opportunity since they can earn income in the long run from their holdings without trading their coins or involving themselves in any computer work.
Another interesting element with PancakeSwap is the hosting of lotteries every 12 hours or twice per day. Entrance into this requires a stake of at least 1 CAKE, equaling one lottery ticket. The lottery pool is the sum of all the CAKE from users who’ve decided to participate.
A match of 4 numbers in the exact order equals a user winning 50% of the pot or splitting this if there are more winners. 2 and 3 numbers matched in exact order win 20% and 10% (lower with more winners), respectively.
What makes PancakeSwap valuable?
PancakeSwap is valuable for two reasons.
Advantages of a decentralized exchange
For starters, some clients prefer a DEX to a CEX. The former has a lower risk of hacking and security breaches since there is no single point of failure. Also, the organization does not take any custody over its users’ funds, hence being referred to as non-custodial.
Analysts laud decentralized exchanges for being much more privacy-conscious than their counterparts since traders retain their private keys and very little personal data is typically required.
Lastly, a DEX has lower fees, and most incentivize users through mechanisms like staking, lotteries, etc.
Competition to Ethereum
According to CoinMarketCap, PancakeSwap presently holds 4.8% of the DEX market share, which is measly compared to SushiSwap’s 11% and Uniswap’s 27.1%, the latter of which is the current leader.
Both exchanges allow for the swapping of ERC20 or Ethereum-based tokens. Some see this dominance as centralization in the market. The biggest issue facing Ethereum is their transaction delays and extremely high gas fees resulting from network congestion.
Fortunately, PancakeSwap does not experience these problems because of its inherently low fee structure, making it an attractive alternative for users.
PancakeSwap is a fine example of the complexities and wonders of the DeFi or decentralized finance space that Ethereum currently dominates. It is incredible all the processes running on such platforms are trustless and do not rely on third-party organizations like other financial institutions.
This value proposition manifests itself daily, meaning it is highly likely adoption of PancakeSwap should increase in the near future.