Similar to Ethereum’s Uniswap, PancakeSwap is a BSC automated market-making (AMM) protocol that lets users swap tokens as well as mine liquidity or stake their tokens for rewards. There are a ton of AMM protocols on BSC. However, PancakeSwap is the leading DeX on BSC and has even occasionally surpassed the trading volume on Uniswap.
The rising tide of decentralized finance (DeFi) platforms has brought with it deliciously sounding applications such as PancakeSwap. From non-custodial decentralized exchanges to decentralized lending and borrowing platforms the choices are endless for today’s crypto enthusiast.
PancakeSwap, for instance, is among the top DeXs in the DeFi space. Even though Ethereum holds the title as the pioneer blockchain network for decentralized applications (dApps) and the biggest host of dApps so far, other competitors such as the Binance Smart Chain have since emerged. An uptick in DeFi applications on Ethereum’s blockchain has resulted in network congestion leading to skyrocketing transaction fees that have gone as high as $100 per transaction. While this incident has birthed a lot of frustrations among crypto traders on decentralized exchanges such as Uniswap, it has also presented an opportunity for Ethereum competitors hence the emergence of the Binance Smart Chain (BSC).
In this guide, we will show you how to use PancakeSwap as we explain how the platform works.
At its core, PancakeSwap is a decentralized exchange on Binance Smart Chain (a blockchain network built by Binance) that was launched on September 20th, 2020. While previous generations of decentralized exchanges have relied on order books, PancakeSwap takes after Uniswap’s automated market-making model and runs completely on smart contracts. Therefore, the smart contracts manage the liquidity crowdsourced from platform users and also controls the process of swapping one token for another. All these PancakeSwap possibilities are facilitated by the Binance Smart Chain.
Barely a year old, Binance Smart Chain was created by Binance, the popular centralized crypto exchange founded by Changpeng Zhao, as a project set to increase the utility of the BNB token. This fast-growing blockchain network was unveiled in April 2020 but went live in September 2020. Now it serves as a compatible alternative to Ethereum’s virtual machine meaning Ethereum-based platforms can easily migrate to the BSC network if need be.
Compared to Ethereum’s blockchain, BSC features lower fees and speedy transaction confirmation periods thanks to a Proof of Stake Authority (PoSA) consensus protocol as opposed to Ethereum’s Proof of Work protocol. Similar to Ethereum however, BSC supports smart contracts thus making it a decent Ethereum alternative for DeFi enthusiasts. Developers can also launch ERC-20 equivalent tokens on BSC that are called BEP-20 tokens. PancakeSwap has CAKE as its native BEP-20 token.
Overall, BSC’s support for smart contracts and a capacity for higher performance makes it possible to launch applications such as PancakeSwap, BakerySwap, SaltSwap, and a plethora of other food-themed protocols that have gained popularity recently.
Beyond first impressions, PancakeSwap features more than your regular food-themed decentralized exchange. It comes with a native token that goes by the ticker CAKE, a trading and liquidity mining protocol, daily lotteries, a launchpad for new tokens, and even a market for non-fungible tokens.
Here is a breakdown of all the possibilities on PancakeSwap.
The CAKE token is a BEP20 token that powers the entire PancakeSwap ecosystem. The tokens are not mined, but they can be earned as rewards for staking or liquidity mining, and they can be bought on the PancakeSwap DeX. The tokens are produced through an emission process where 40 CAKE tokens are emitted per block. Although there is no hard cap for CAKE’s token emission, deflationary measures such as token burning are implemented. For each block, 20 CAKE tokens are burned, effectively reducing the number of emissions per block to 40 CAKE.
Token burns are conducted every Monday in the following schedule:
In terms of CAKE token distribution for every emission per block, farmers (liquidity miners) receive 60%, CAKE holders get the remaining 40%.
The funny idea behind PancakeSwap is to enable seamless swapping of tokens similar to how a chef would swap pancakes on the frying pan hence the name “pancake swap.”
Rather than rely on order books to match orders between traders or peer-to-peer marketplaces where you have to find a buyer or seller to exchange one token for another, PancakeSwap relies on an automated market maker. An AMM is an algorithm that comprises several smart contracts programmed to first outsource liquidity from users on the exchange then provide that liquidity to traders looking to swap one token for another.
Users are incentivized to supply liquidity to a smart contract, thus forming a liquidity pool. Then, a trader can access the available liquidity in the pool for a fee. It is the trading fee charged to the traders that are distributed among the users who contributed to the liquidity pool according to the share of their contributions. The entire process is programmed into smart contracts.
Apart from swapping tokens, PancakeSwap also features a staking platform where users can earn more tokens by locking their crypto funds for a given period. For instance, you can earn more CAKE tokens by locking your CAKE into a SYRUP pool.
A SYRUP pool is simply a feature on PancakeSwap that locks your tokens into various smart contracts or pools qualifying you as a holder of CAKE tokens thus rewarding you with more CAKE earnings. Different SYRUP pools come with different CAKE earning potentials. For instance, you can stake your CAKE with the Auto CAKE pool and automatically compound earnings or you can use the Manual CAKE pool that requires you to compound your earnings manually.
Apart from the two pools mentioned above, you can also use other SYRUP pools to stake other tokens supported on the platform. Most of the alternative staking pools on the platform start with the work “Earn” before the ticker symbol of the token.
Users who provide liquidity to PancakeSwap are referred to as farmers or liquidity miners as they are entitled to multiple revenue streams for their contribution to the DeX. The process can be equated to miners on the Bitcoin network receiving a portion of the Bitcoin rewards distributed per block as compensation for the work of safeguarding and maintaining the network.
To begin with, the farmer receives liquidity pool tokens (LP) upon submitting their liquidity to the DeX. Therefore, each holder of LP token receives a portion of the average 0.2% of fees generated by traders. Unlike staking with SYRUP pools, liquidity mining does not have lockup periods; therefore, the user can add or remove liquidity at any time.
In addition to earning a percentage of the fees generated on the exchange, LP token holders can also stake those LP tokens for more earnings. For example, a user who has provided liquidity for the CAKE-BNB pool will earn a portion of the fees distributed to the members of that pool and can still stake those LP tokens for a 58.41% APR in the CAKE-BNB farm. Therefore, the liquidity provider can earn more CAKE, or more BNB depending on the rewards of that farm (LP staking pool).
PancakeSwap also features a Launchpad for new tokens called an Initial Farm Offering. Through this new ICO (Initial Coin Offering) model, liquidity providers on the CAKE-BNB pool can become early investors into new project tokens by depositing their LP tokens into the IFO smart contract. Participation is easy as all that is required is liquidity for the CAKE-BNB pool. Therefore you would have to buy an equivalent amount of both BNB and CAKE then deposit both tokens to the liquidity pool to receive LP tokens. Your LP amount will determine the amount of IFO token projects you receive upon distribution; therefore, the more LP you have the more IFO token projects you receive.
PancakeSwap introduces interoperability into the DeFi space with the BinanceBridge feature that allows users to trade Ethereum’s ERC-20 tokens on PancakeSwap. To trade an ERC-20 token on PancakeSwap, head over to the BinanceBridge platform and connect your MetaMask wallet. Make sure your wallet is on the Ethereum main network. You will receive a prompt to confirm the transaction after selecting the ERC20 token in your wallet you want to turn into a BEP20 token. Since the transaction is on Ethereum’s network, you might end up paying expensive gas fees. However, once the ERC20 token is wrapped, you can then enjoy cheap transaction fees on BSC. This capacity to use Ethereum based tokens on PancakaSwap expands the utility of PancakeSwap such that anyone can trade tokens across blockchains and even use cross-chain assets to mine liquidity on PancakeSwap.
Another feature of the PancakeSwap DeX is PancakeSwap’s growing marketplace of NFT Collectibles that come with a financial twist as opposed to the pure collectability driving the current wave of NFT sales. On PancakeSwap, you have access to rabbit-themed NFTs that can be redeemed for CAKE. Participation in the NFT giveaways requires registration, where lucky NFT winners are picked at random. Similar to other NFT auction platforms, NFTs on PancakeSwap are mostly speculative as their price in CAKE fluctuates from time to time. Users who play the PancakeSwap lottery also stand a chance of getting NFT rewards.
If you are feeling lucky, you can buy lottery tickets with your CAKE tokens and play the odds in a lottery game that takes place every six hours on PancakeSwap. The lottery is designed such that each ticket represents an entry to the draw. Each ticket is unique, and once they are drawn and the winning numbers are revealed, users with two or more matching winning numbers on their tickets win a portion of the CAKE in the lottery pot. The lottery works similar to any other lottery you would expect, whereby the more entries you get with your tickets, the higher your chances of winning.
In addition to the features highlighted above, PancakeSwap goes above and beyond to provide a decentralized prediction market where users can predict the market movement of BNB’s price. Correct predictions win a variety of giveaways. Other features on PancakeSwap include the teams and profiles feature where platform users can create profiles and form teams that compete with each other based on the achievements made on the platform.
PancakeSwap has an intuitive user interface that is straightforward and beginner-friendly. At first, you will find that most of the platform’s features are locked. Therefore, you need to connect your wallet before proceeding to unlock the features. Make sure that you are connecting to the correct website as there are hackers who can mimic the PancakeSwap web address to steal funds from your wallet. Check to see that you are connected to ‘pancakeswap.finance’ which is the correct address.
Once you are securely connected to PancakeSwap, you can go ahead and start looking at the different features available on the platform. The following guides will help you start staking coins, swapping tokens, and mining liquidity on the platform.
Swapping is pretty straightforward once you have your wallet connected to the platform. You will need some BNB in your wallet as the platform will connect directly to your wallet to credit or debit your wallet accordingly. Make sure that your wallet is switched to the Binance Smart chain network.
Switching to the BSC network on MetaMask is easy. First, click on the network dropdown on your MetaMask plugin.
Then select custom and enter the following details:
Now click the save button, and you will be able to select the BSC network once you click the network dropdown.
Afterward, connect your wallet and use BNB to buy CAKE or any other token on the DeX.
Upon clicking the connect button at the top right corner of the page, you will receive a prompt to connect your wallet. Apart from MetaMask, there is a variety of other Web 3.0 wallets you can choose from, including TrustWallet, SafePal Wallet, and TokenPocket, to mention a few. Throughout this tutorial, we will use MetaMask as an example.
Right after authorizing the platform’s connection to your wallet, you will be able to see the BNB balance in your wallet reflect on the exchange.
Now, click the select button and choose the token you want to swap with your BNB tokens.
When the transaction is complete, you will receive your tokens in your MetaMask wallet, and BNB will be deducted from your wallet as well.
Similar to swapping, the process of staking coins on PancakeSwap is simple. After swapping your BNB with CAKE, head over to the ‘Pools’ segment of the site to access the Syrup Pools. Among the Syrup pools, you will be able to see all the staking pools available for CAKE as well as other tokens supported on the DeX.
For instance, if you pick the Auto CAKE pool, you will see details about that pool’s performance and the unstacking fees charged to that pool. Once you decide to go with the Auto CAKE pool, click enable and set the amount of CAKE you want to stake in that pool. You will only be able to set the amount you want to stake from your MetaMask pop-up window, as seen in the figure below.
Liquidity refers to the ability to easily exchange one asset for another without destabilizing that asset’s market. Therefore, if you are a liquidity provider, you need to make it easy for users to exchange one token for another. Automated market-making protocols, as is the case with PancakeSwap, require you to deposit two sets of tokens or cryptocurrencies to the liquidity pool.
For instance, if you are providing liquidity for the BNB-CAKE pool, and you want to own 50 percent of a pool worth $1000 in liquidity, you will need 1BNB priced at $500 and 50CAKE tokens priced at $10 in your wallet. By depositing an equivalent amount of both tokens, you help maintain the constant product formula of the AMM algorithm that maintains the liquidity value in the pool at $1000.
Armed with your BNB and CAKE token in your MetaMask, follow these steps to mine liquidity.
First, go to the ‘Trade’ section and click on the dropdown menu to reveal the liquidity option. This is what you will see on the liquidity page.
Now select the tokens you want to deposit in the pool and confirm the transaction on your MetaMask. Based on the price of the tokens, the number of tokens you need to submit to achieve an equivalent value will vary, as seen in the example below.
Once you confirm the transaction and add liquidity, your BNB and CAKE will be locked in the pool, and you will receive LP tokens in your wallet. You can go further and stake your newly received LP tokens in one of PancakeSwap’s farming pools to receive even more CAKE. The platform supports over 60 liquidity mining pools that offer yields ranging from 23.52% to 378.2% APY.
Going forward, you can come back to the platform to check the progress of your farm, and you can even choose to harvest the yields earned and move them to your wallet or re-invest them by swapping for other tokens.
Ease of use
The first main advantage of using PancakaeSwap is its intuitive user interface that is simple enough even for beginners. Anyone can navigate the application and start making a profit without prior experience with the platform.
Next, the platform is quite responsive, and transactions are confirmed in less than 5 seconds. Speedy transaction processing makes it possible for users to perform arbitrage trading opportunities for even more profits.
This is one of the biggest advantages of using PancakeSwap. Thanks to the fact that the BSC network does not rely on gas prices, traders can transact at a fraction of the cost on Ethereum- based DeXs such as Uniswap.
No KYC Required
Know your customer, and anti-money laundering rules require users on centralized exchanges to submit extensive documentation to access services on a centralized exchange. DeXs such as PancakeSwap are different as they allow anyone from any part of the globe to trade, mine liquidity, and stake on the platform with zero restrictions.
A deflationary native token
In an era of increasing concerns about hyper-inflation, tokens that adopt a deflationary approach have become the darlings of DeFi and crypto at large. CAKE is no exception. Its deflationary mechanisms help developers adjust to the fast-changing marketplace while enabling investors to protect future investments.
While mining liquidity and earning rewards are simplified on PancakeSwap, an impermanent loss is one of the biggest downsides of providing liquidity on the DeX. Impermanent loss is when the price of a token in your liquidity pool changes drastically compared to its price when you deposited the token in the liquidity pool. This results in a loss in the final amount of tokens you will be able to receive when you withdraw liquidity. Impermanent loss arises from the fact that most DeXs are built with a constant product market-making protocol that prioritizes maintaining a constant value of the total assets in the pool.
For instance, if Alice provides liquidity for the BNB-CAKE pool, having bought BNB at $500 per coin and CAKE at $10 per coin, Alice would have to deposit 1BNB and 50CAKE for a pool whose constant liquidity value is set at $1000.
However, if the price of BNB were to appreciate to $1000 per coin right after Alice locked funds in the pool, Alice would incur a loss in BNB as the ratio of BNB to CAKE in Alice’s pool would change to fit the constant product formula. Therefore, Alice will have 0.5BNB tokens and 50 CAKE tokens, having lost on the gains she would have made on BNB had she not locked the BNB in the pool.
In addition to impermanent loss, another disadvantage that could work against PancakeSwap is the fact that the platform is built by an anonymous team of developers. Even though several DeFi platforms are known to have anonymous teams, this aspect could limit the trust users have in the longevity of the platform.
Even with an anonymous team, PancakeSwap developers have worked hard to get the platform working with all the added features in the few months of its existence. As one of the biggest DeXs of the BSC network, PancakeSwap has a promising future considering its growing number of users.
While critics argue that BSC is not a fully decentralized blockchain network, the reality is that BSC’s PancakeSwap is a welcome reprieve in the DeFi world as it offers a cheaper, faster, and convenient alternative to Uniswap.
Beyond the trend of meme projects and DeXs named after food, the many useful features on PancakeSwap make it easy to see why the platform has been receiving growing interest from DeFi enthusiasts. What’s more, not only does the platform benefit from BSC’s interoperability, it also benefits from the Binance Accelerator Fund that helps BSC projects grow rapidly.
As the entire DeFi sector continues to grow, and as PancakeSwap’s utility evolves, more users are likely to join the fray pushing user numbers upwards from the current 333,690.