What Is PancakeSwap? A Guide For Cryptocurrency Beginners

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Mrcoin

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PancakeSwap is an automated market maker (AMM) that allows two tokens to be exchanged on the Binance Smart Chain which means it is fast, cheap, and allows anyone to participate. How does it work? Let's find out your answer from this article.​

1. What is PancakeSwap?

Launched in September 2020, PancakeSwap is well-known as a decentralized exchange (DEX) which allows for trading cryptocurrencies and tokens without an intermediary and also runs on the Binance Smart Chain.

The project is built on an automated market maker (AMM) system which relies on user-fueled liquidity pools between token pairs to enable crypto trades.

In addition to the capabilities of a traditional crypto platform (swapping, trading, yield farming, staking, NFTs), PancakeSwap offers several proprietary features: Initial Farm Offerings (IFOs), Yield Farms, Syrup Pools, PancakeSwap Lottery, Prediction Markets, and NFT Collectibles.

PancakeSwap is partially governed by the community and CAKE holders are able to use PancakeSwap's voting portal to vote on governance proposals.

2. How does PancakeSwap work?

PancakeSwap uses an automated market maker (AMM) that relies on the funds deposited into smart contracts, also known as liquidity pools. These funds are then automatically available for users to trade against. The biggest selling point of this model is that there is no need to involve intermediaries or an order-matching exchange infrastructure.

Anyone can take up the role of a liquidity provider, there are no know-your-customer (KYC) restrictions on the trading section of the platform.

As for incentives, liquidity providers are rewarded with a share of the transaction fees paid by traders. The percentage allocated to each liquidity provider depends on his share of the total liquidity deposited in the pool.

In addition, liquidity providers can take things up a notch by engaging in yield farming strategies by depositing a pair of BEP20 tokens in the appropriate pool and receive liquidity pool (LP) tokens which represent the amount deposited by each liquidity provider in a pool.

The liquidity provider can then stake those LP tokens in a farm in order to generate earnings denominated in CAKE. CAKE unlocks several opportunities to generate earnings to anchor the incentive-based economy of PancakeSwap’s AMM.

It functions as the governance token of the PancakeSwap protocol as well. Particularly, this governance utility ensures that users can influence policy changes and developmental implementations.

The CAKE token earned from yield farming can be staked in PancakeSwap’s Syrup pools to generate additional interest. Furthermore, this strategy combines three income-generating opportunities to attract liquidity providers and help them maximize profits.

Other services available on PancakeSwap are the lottery, the NFT marketplace and an initial farming offering, a service designed to help BNB Smart Chain developers raise liquidity for their projects and allow users to access the tokens of newly launched BNB decentralized applications.

At the core of PancakeSwap’s operations is an on-chain governance system anchored by CAKE. In essence, CAKE holders can partake in on-chain voting whenever there is a decision regarding the policies and future development of the protocol to be made.​

3. What is the difference between PancakeSwap and Other DEXes on Ethereum?

The majority of decentralized exchanges, like Uniswap and Sushiswap, are based on the Ethereum blockchain, where a considerable volume of decentralized finance (DeFi) action occurs.

Unlike the PancakeSwap that was launched in September 2020, Sushiswap was created a month earlier, while Uniswap was launched in Nov 2018.

PancakeSwap is built on the Binance Smart Chain and uses BEP-20 while the other two are built on the Ethereum blockchain and use the popular ERC-20 token.

Due to the problem of high trading fees on Ethereum, individuals switch to PancakeSwap because it offers much lower trading fees.

Created earlier than PancakeSwap, the Ethereum-based DEXs have a vast number of users, developers, and tools for making the needed decentralized applications.

However, the fact that BSC is newer and not well-rooted yet does not hinder it from making progress.

The DEX is already recognized among other DEXs. On multiple occasions, it has surpassed long-time top DEX, Uniswap, to become the most popular DEX regarding trading volume, although it hasn’t consistently maintained the position.​
 

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