PancakeSwap – What Is It? How Does It Work?

Among the major examples of DEXs like Uniswap and Sushiswap (both based on the Ethereum network), this article will focus on PancakeSwap. What is PancakeSwap, and what makes it different from the other Ethereum-based DEXes?

Let’s dive right in!

What is PancakeSwap?

PancakeSwap is a decentralized exchange built on Binance Smart Chain (BSC). Like all decentralized exchanges, you can trade tokens without the need for a centralized intermediary and at the same time keep custody of your tokens while on PancakeSwap.

Launched in September 2020, the PancakeSwap uses an Automated Market Maker (AMM) model, which does not require an order book to match you with someone else whenever you want to trade digital assets on the platform. Instead, you trade against a liquidity pool via smart contracts.

With this feature, you can make the swap you want and keep your coins in the pool while earning rewards simultaneously. The platform has a native token called CAKE, which is a BEP-20 token. The liquidity pools are known as SYRUP pools.

how does pancake swap work

As an exchange based on Binance Smart Chain, does it mean that PancakeSwap is controlled by Binance, a centralized exchange service? No! Binance does not have authority over the decentralized exchange as it was built by anonymous developers.

PancakeSwap is explicitly used for BEP-20 tokens running on BSC. Although individuals can transfer tokens from Binance or other exchanges into the DEX, they will first have to “wrap” these tokens as a BEP-20 token before using them on the platform.

One of the main reasons why Binance’s development team made BEP-20 tokens, tokens based on BSC, was for the purpose of creating smart contracts and a staking mechanism for Binance coin (BNB).

Although the main features of BEP-20 are similar to the popular ERC-20 token standard, the BSC-based token can be used for trading at a less expensive cost and for accessing opportunities that Ethereum-based tokens cannot provide.

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.

How Does PancakeSwap Work?

Since PancakeSwap does not support fiat currency, it is important to have cryptocurrencies, especially CAKE tokens, alongside some BNB before anything else. These currencies can be stored in crypto wallets like Trust Wallet, MathWallet, and Binance Chain Wallet.

You can also use the Ethereum wallet, MetaMask. You just have to configure it to work with Binance Smart Chain.

Next, visit their website at https://pancakeswap.finance/ and connect your wallet there. All of the platform’s functions are displayed on your web browser’s left side of the screen. You can either provide liquidity, trade, or farm the tokens.

  • Adding liquidity: To provide liquidity, you tap on the “pools” tab to deposit funds into any of the available liquidity pools. By doing so, you receive a Liquidity Provider (LP) token in return. The LP tokens that are distributed to all users are received from a portion of the trading fees that every user pays for using the platform.

Out of the average 0.2% fee, 0.17% gets redistributed to LP token holders directly, while the rest of the fee is kept in the PancakeSwap Treasury to maintain the platform.

  • Trading: To swap or trade the LP tokens you have received for-profits, tap on the “Trade” option, select “Exchange”, and then choose which token in your connected wallet that you wish to trade or swap. For the transaction to be completely successful, you will have to confirm it within your wallet.
  • Yield Farming: To farm, tap on the “Farms” tab, and select any of the pairs that tally with your LP tokens. Then click on “Approve Contract” to approve the movement of BEP-20 tokens. Confirm the transaction in your wallet and select the number of tokens you want to stake.

You can harvest your rewards any time you want, just click on “Harvest” and confirm the transaction.

Conclusion

PancakeSwap is the largest and most frequently used AMM on the Binance Smart Chain both for yield farming and staking of tokens. Ranking second on the list of top DEXs on CoinmarketCap, the platform is nearing record as much daily trading volume as the first, Uniswap.

The progress made by PancakeSwap and other DEXs shows the increasing level of innovation in the DeFi space.

Leave a Reply

Your email address will not be published.

Related Articles
Read More

BSN Blockchain Project Expands To Turkey And Uzbekistan

The partnership deal was made possible by Red Date Technology, the architect firm behind BSN, through collaboration with the Turkish Chinese Business Matching Center (TUCEM). TUCEM is a body that was created in 2006, and it has since grown to become a major commercial hub...
Read More

VISA Praises NFTs For Making Crypto 'Cool' To The Masses

NFT BoomNFT traders, creators, and investors exchanged an estimated $10 billion between July, August, and September. The attention generated by the non-fungible token hype has also spilled over to cryptocurrency projects that feature NFTs. Marketplaces that facilitate the exchange of these non-fungible tokens have experienced...
Total
0
Share