DeFi 101: What Is PancakeSwap (CAKE) And How Does It Work?

2021/07/07 01:13:25

Decentralized Finance is no longer a concept, it’s a new reality. DeFi has led to the uprising of a movement that is leveraging blockchain to transform the outdated traditional financial system to run more efficiently and inclusively without an intermediary. Ethereum set the cornerstone for establishing the DeFi ecosystem; however, slowly and steadily, other blockchains and smart contract platforms like Binance Smart Chain (BSC) are catching up.

While DeFi aims to empower everyone with financial services that are usually exclusive in traditional financial institutions, it suffers from a lot of complications. Today, the majority of the DeFi transactions occur on the Ethereum blockchain. Each of these transactions suffers at the hands of Etheruem’s network scalability issues such as network congestion and high network fees.

The costs of transactions have gone up in the last few months, meaning simple transactions could cost over $20, and complicated interactions between smart contracts could be worth well over $200 depending on the network usage at the time.

Source: The Block

DeFi is reshaping wealth distribution and is banking the unbanked; however, complications such as network congestion, high network fees, and more, can stir up quite a bit of hesitation from both developers and users. Ethereum’s inherent problems have led developers, users, and investors to look for better options with faster throughput and lower network fees, and Binance Smart Chain came out as a strong contender.

The Binance Smart Chain is a faster and much cheaper alternative to the Ethereum blockchain. The same smart contract interaction that would cost over $200 on the Ethereum blockchain costs less than $0.05 on the Binance Smart Chain.

Moreover, due to Etheruem’s scalability issues, transactions could go unverified for days; however, Binance Smart Chain solves those issues and delivers very high throughput, making it the ideal catalyst for DeFi projects, especially Decentralized exchanges (DEX).

You can see the rise of the Binance Smart Chain as it projects almost 40% of the total value locked in DeFi. Promising smart contract platforms like Binance Smart Chain are catalyzing the emergence of Decentralized Exchanges that empower users with complete control over their funds.

Source: The Block

The emergence of DeFi projects and cryptocurrency exchanges over the last year led to the urgency of Decentralized exchanges in the market. Solutions such as PancakeSwap are leading the DEX conversation, showing how Decentralized Exchanges are the new rage in town.

Source: The Block

What is PancakeSwap, and how does it Work?

PancakeSwap is a decentralized exchange that allows users to trade cryptocurrencies and tokens without an intermediary, taking custody of your tokens during the process. PancakeSwap is built explicitly for swapping BEP-20 tokens, and is analogous to platforms such as Uniswap and SushiSwap.

With over $6.8B total value locked, PancakeSwap success trumpets Uniswap’s $5.2B, and SushiSwap’s $2.7B in gross value locked. Consequently, PancakeSwap is home to over 230,000 daily users compared to SushiSwap’s 2600, and UniSwap’s 33,000 users. With a larger user base, high value locked, and exceedingly high trading volumes, PancakeSwap is undoubtedly one of the largest DEXs in the market.

Source: DeBank

Unlike Centralized Exchanges that utilize an order book mechanism, Pancakeswap utilizes the Automated Market Maker (AMM) model. Users can trade digital assets; however, unlike order books where they have to wait to be matched with someone else, users trade against liquidity pools.

Liquidity pools on PancakeSwap are composed of users’ funds. Users deposit their funds to the pool and in return, they receive liquidity provider or LP tokens. Users can use their tokens to reclaim their funds, including a portion of the trading fees. Simply put, users can trade BEP-20 tokens, add liquidity, and earn rewards.

But that’s not it; PancakeSwap also allows users to farm its governance token, CAKE. All you have to do is deposit your LP tokens, lock them up, and get CAKE in return. You can stake your CAKE and earn tokens through special staking pools called SYRUP pools. SYRUP pools are staking pools, where you can stake your CAKE and get more CAKE (sounds cool).

You could also participate in lotteries on PancakeSwap. Try your luck and get your ticket for 10 CAKE a piece. Your ticket will be composed of a random four-digit combination of numbers between 1 and 14. To win the grand prize, 50% of the entire lottery pool, your ticket numbers need to match all of the numbers in the same position as the winning ticket.

Also, you don’t have to worry about not matching all four. You could also get rewarded if two or more of your numbers are in the same position as the numbers in the winning ticket. PancakeSwap also allows users to win exclusive NFTs through its platform.

Through PancakeSwap, you can get your hands on some of the most exclusive and cutest NFTs on BSC. If you win, you could either trade it for CAKE or collect it. You could also participate in PancakeSwap’s initial farm offerings. All you have to do is commit your LP tokens from a support pool and get your hands on newly launched tokens.

Conclusion

Over the last year, the emergence of DeFi projects proved that Ethereum could not handle the hype, leading to the urgency of uncongested and faster smart contract platforms like Binance Smart Chain. PancakeSwap is the largest AMM project on Binance Smart Chain, with some of the most innovative features in the crypto space.

While Ethereum may have initiated the DeFi wave, initiatives like PancakeSwap show that the wave of innovation is destined to spread to other chains. Until Ethereum 2.0 isn’t live, the best option right now are platforms like Binance Smart chain, and PancakeSwap is the perfect example of a decentralized platform that isn’t affected by scalability issues. Besides, PancakeSwap (CAKE) was already listed on KuCoin early this year, and you can head over KuCoin spot trading to buy CAKEs. Isn’t that cool?