Over the last few years, we have seen the massive growth of different decentralized finance (DeFi) platforms all around the world. As you might already know, PancakeSwap is one of these platforms that have been growing on top of the Binance Smart Chain (BSC) blockchain network.
Considering that PancakeSwap became the flagship project on BSC, lots of investors have already placed some money in it. But what exactly PancakeSwap is? How does PnacakeSwap work? What is CAKE? These are some of the questions that people in the cryptocurrency market are making.
Therefore, in this guide, we are going to tell you everything you should know about this decentralized exchange (DEX) and how it works.
What are Automated Market Makers?
Before we get into the details of PancakeSwap, we should talk about Automated Market Makers (AMM). This will give you an idea of how PancakeSwap works.
Automated market makers are decentralized exchanges (DEX) that do not depend on an order book to process traders. When we use a traditional cryptocurrency exchange, traders create limit orders (buying or selling). These orders will then get filed as traders perform market orders and take liquidity from exchanges.
This has been the most common way for users to trade virtual currencies. However, there have been new projects that worked in an automated market maker platform such as PancakeSwap in which there are no order books. Despite that, it is possible to buy and sell virtual currencies without having to be worried about order books.
In order for Automated Market Maker platforms to work, they need to create different liquidity pools. In this way, it is possible to automate the process of creating liquidity and matching trades for investors.
A liquidity pool consists of two different cryptocurrencies (for example Bitcoin and Ether) that will have an impact on each others’ prices. If ETH coins are sold to purchase Bitcoin, the price of BTC goes higher compared to ETH. Now, if BTC coins are sold to purchase ETH, the price of BTC will fall compared to Ethereum.
Thanks to the “constant formula” that rules liquidity pools, it is possible for investors to rely on these decentralized exchanges without order books to buy and sell virtual currencies. Usually, the name given to these trades is called “swap.” This is also one of the reasons why PancakeSwap got that name.
Despite the fact that liquidity pools and automated market makers have been working very good over the course of the years, there are some weak points that should be addressed by the community. For example, if there is a large demand for an asset but there is not enough liquidity in the pool, you might end up overpaying for the asset that you want to buy. However, this also works as a way to incentivize investors to come and make a profit by arbitraging between exchanges and DeFi protocols.
What is PancakeSwap?
Let’s now get into the details of what PancakeSwap is. PancakeSwap is a decentralized exchange and automated market maker that lets users buy and sell a wide range of digital currencies running on top of the Binance Smart Chain blockchain platform.
Over the last few years, this became the largest DEX on top of the Binance Smart Chain ecosystem. PancakeSwap is now allowing users to trade virtual currencies without having to go through a centralized platform such as a crypto exchange.
There are many advantages of PancakeSwap that are worth taking into consideration. Thanks to the fact that it lets users trade a wide range of pairs, the platform was able to expand and offer new services and solutions to clients. That means that, nowadays, there are many other things that you can do as investors besides trading on top of PancakeSwap.
For example, users can get rewarded by providing liquidity to a specific trading pair, they can invest in different projects thanks to PancakeSwap’s Initial Farm Offerings (IFOs), and they can also participate in different farms and earn token rewards.
PancakeSwap became so popular thanks to the fact that it offered users large liquidity compared to other AMM platforms in the market. Even after the most recent sell-off in the cryptocurrency market, PancakeSwap continues to offer more than $3.81 billion in liquidity in different trading pools.
Now, when it comes to volumes, they have been consistent over time. There were periods with larger volumes (May, October and November 2021) and other periods with lower volumes. This shows that despite the volatility in the market, there has been a clear interest in PancakeSwap and the services offered.
Some of the top traded tokens include Binance USD (BUSD), Wrapped Binance Coin (WBNB), Tether (USDT), USD Coin (USDC) and BTCB Token (BTCB), among others. There is a variety of assets that have been traded using PancakeSwap and the platform continues to offer some of the most popular assets in the industry.
Due to the fact that there is no exchange management (it is not a centralized exchange), there are many benefits of using this platform compared to other centralized exchanges. Another thing we should talk about is the CAKE token that powers the whole PancakeSwap ecosystem.
As mentioned before, the CAKE token is the digital asset that powers the whole operations of the PancakeSwap platform. That means that if you want to interact with this platform, you will have many benefits if you use CAKE rather than other currencies.
CAKE is a BEP20 token that was created by this AMM platform in order to offer users an incentive to provide liquidity. Every single time that there is a transaction on the platform, there is liquidity that is being taken from one of these pools. People that provide liquidity will then be rewarded with CAKE tokens for each of the transactions that are processed in this AMM and DEX exchange.
Hence, CAKE is used as a reward to users that provide liquidity to the PancakeSwap platform. You get rewarded by using Liquidity Provider tokens (a confirmation token that shows that you are providing liquidity to two different pools), which should then be locked up to get rewarded with CAKE.
CAKE is a cryptocurrency as any other. You can send them to a cryptocurrency exchange such as Binance and exchange them for EUR or any other fiat currency. Moreover, you can use CAKE to further increase your positions on the platform. There is a possibility to provide liquidity using CAKE in different pools.
According to CoinGecko, CAKE has reached an all-time high of over $42 per coin in May 2021. The virtual currency then entered a bear trend that continues until today. This is something that happened to other virtual currencies as well and that shows that there has been a market correction over the last year.
Nowadays, CAKE is being traded at close to $4.20 and it has a market valuation of $1.26 billion. This makes CAKE the 58th largest cryptocurrency in the market. Nowadays, CAKE is larger than older virtual currencies such as Bitcoin Satoshi Vision (BSV), Waves, DASH or NEM (XEM).
In order for CAKE to continue growing in the future, it would be needed a new influx of funds to the crypto ecosystem. This is due to the fact that CAKE continues to be printed in order to reward users that provide liquidity to the protocol. There have been some initiatives to put a total cap on CAKE’s coin supply.
Where to Buy CAKE?
There are different cryptocurrency exchanges that would let you buy CAKE. The platform that you select will highly depend on your needs and your knowledge of digital assets. For example, you can currently buy CAKE using PancakeSwap directly or different exchanges such as Binance or HitBTC.
The best way to buy CAKE is, obviously, using PancakeSwap. However, PancakeSwap does not have a fiat on-ramp solution for users to buy CAKE and other virtual currencies. This is one of the reasons why using a traditional cryptocurrency exchange would be easier if you are new to the crypto market.
Another thing that you should take into consideration is related to the use that you will give to CAKE. Which are your plans for CAKE? Are you planning to hold it for a long period of time? If you want to hold CAKE for a long period of time, the best thing that you can do is stake your coins in PancakeSwap and earn rewards.
Binance is the largest cryptocurrency exchange in the market. If you use this platform, you will definitely have a good experience with it. There are many benefits of using Binance rather than other local exchanges. You should analyse whether Binance would be a good option for you in your jurisdiction and decide whether to buy or not CAKE using this platform.
Another option available is, as we mentioned before, HitBTC. This cryptocurrency exchange has added a large number of trading pairs for users to trade and they have also added support to CAKE. You can buy CAKE using USDT in HitBTC. Binance is supporting the following trading pairs: CAKE/USDT, CAKE/BUSD, CAKE/BNB, CAKE/BTC and CAKE/GBP.
PancakeSwap is offering different services to users. They are not only focusing on being a swapping platform, but they are also making it possible for users to get access to farms and pools. Let’s get into the details of each of them.
A swap is a term used for exchanging a cryptocurrency for another using an AMM platform such as PancakeSwap. Users can trade their virtual currency for another one without having to use an order book. For example, users on PancakeSwap can easily exchange their CAKE tokens for BUSD in just seconds.
Everything is possible thanks to liquidity providers on different pools. Swapping is the most popular service offered by PancakeSwap and by other similar platforms to this one. Therefore, you can enjoy a great trading experience without having to be worried about using order books. You can simply swap your coins for other digital currencies and you will get your coins credited to your wallet.
Yield farming is another key service offered by this cryptocurrency trading platform. The goal of yield farming is to offer returns to investors that deposit their coins on a specific smart contract. Users on PancakeSwap can earn CAKE rewards by staking LP tokens.
You get LP tokens when you provide liquidity to a liquidity pool. For example, if you have BUSD and BNB, then you can deposit these two coins in the liquidity pool and get rewarded with the fees paid by traders that take liquidity from the pool (proportionally to your holdings in the pool).
When you provide liquidity to that pool, you will get LP tokens. These tokens will be then staked in different farms and you will get rewarded with CAKE tokens. That’s how easy it is to start earring CAKE rewards using this DEX platform.
Each yield farming service in the crypto industry might reward you with different tokens. PancakeSwap offers you CAKE tokens that can then be sold to the market. This is a way of incentivizing liquidity to make swaps easier and more reliable.
Finally, we need to talk about liquidity pools. We have already mentioned them in this article, and they play a key role in making it possible for users to exchange their coins using AMMs. Liquidity Pools make it possible for investors to exchange tokens for one another.
Without liquidity pools, it would not be possible to exchange coin A for coin B. Let’s get into an example. Let’s say that you want to transact coin A for coin B in a centralized exchange. There will be an order book with all the selling orders of coin B. You can execute a market order and get coin B in exchange for coin A.
Now, in AMMs, there are no order books. So, where does liquidity come from? It comes from liquidity pools. These are pools of two different tokens (A and B) that give liquidity to different trading pairs. In this way, it is possible for users to swap coin A for coin B in seconds.
Due to the fact that after this exchange there will be more A tokens and fewer B tokens in the pool, algorithmically, the price of token B will be higher. People who deposit two coins in a liquidity pool get rewarded with the fees paid by users that use the swapping services. If you own 10% of the liquidity pool, then you will get 10% of the commissions paid by traders.
When you provide liquidity to a certain pool, you get rewarded with LP tokens that can then be used to farm CAKE and get extra rewards.
Proposal to Limit Token Supply
There has also been a new proposal in the PancakeSwap community in order to limit the total supply of CAKE. Until now, there was no cap on the total supply of CAKE tokens. This has been pushing the price of this virtual currency lower. Why? Because it has created a situation in which new tokens are created on a daily basis to reward LP holders.
Therefore, we have seen strong pressure from investors in these DeFi protocols to start limiting the maximum supply of their tokens in order to avoid further depreciation. The community is mostly in favour of this proposal to limit CAKE’s token supply.