What is PancakeSwap?

PancakeSwap is a decentralized exchange that runs on the Binance Smart Chain, a blockchain built by the world’s largest cryptocurrency exchange, Binance. PancakeSwap lets you swap tokens, invest in yield farms and liquidity pools, and buy and sell collectibles. It is part of the ever-growing world of decentralized finance protocols.

What is decentralized finance and how does PancakeSwap fit in?

Decentralized finance, often shortened to DeFi, refers to non-custodial financial smart contracts—bits of computer code that let you execute complex financial transactions, like trading or investing, right on the blockchain without any need for intermediaries. PancakeSwap is a DeFi protocol.

On DeFi protocols, you control your funds at all times, you can’t be blocked or banned from the protocol and you don’t have to provide any form of identification. This makes applications like PancakeSwap distinct from traditional financial institutions (referred to derisively as TradFi by DeFi “degens”), which collect customer information to adhere to local regulations and can freeze you out of your account if you break the rules.

There are varying levels of decentralization, and a blockchain or protocol that is more decentralized tends to be, at least for now, either slow, expensive or insecure. Bitcoin or Ethereum are very decentralized but they are very slow and transactions are expensive.

As of this writing, a particularly traffic-heavy day in September 2021, it costs $86 to swap a token on decentralized exchange Uniswap (the Ethereum-based version of PancakeSwap, which also preceded PancakeSwap by a number of years). By comparison, it cost us $0.61 to swap a token on PancakeSwap.

What is the Binance Smart Chain?

PancakeSwap is so cheap to use because it is based on something called the Binance Smart Chain, which claims in marketing materials to be faster than Ethereum, the go-to blockchain for smart contracts, without sacrificing on decentralization.

Binance Smart Chain has 21 validators, many of which have ties to Binance, and these validators are chosen by 11 validators of Binance Chain, another blockchain that Binance Smart Chain is independent of but uses to increase its speed.

These 11 validators are thought to be controlled or heavily influenced by Binance. Messari analyst Wilson Withiam wrote on April 12, 2021, “It’s hard not to presume that each Binance Chain validator is in some way connected or tied to Binance.”

In comparison, Etheruem has 223,624 validators. People frequently argue that Ethereum’s decentralization is also somewhat fantastical since many protocols rely on centralized hosting services. Moreover, protocols themselves are often not entirely decentralized: They are usually managed by small teams. Just a few people hold huge amounts of influence over the trajectory of the network.

However, in terms of its validators—a useful indicator of who actually processes transactions and could alter the network if they banded together—Binance Smart Chain is comparatively centralized.

Though it may be less decentralized, the low cost and high speed of Binance Smart Chain make it attractive for people who are priced out of Ethereum. The blockchain only launched in September 2020 but, as of the end of August 2021, people have locked up $22.68 billion worth of tokens on Binance Smart Chain. That’s about a quarter of the total value locked in Ethereum, which is about $84 billion.

What is PancakeSwap?

PancakeSwap is the most popular application on Binance Smart Chain. It fulfills the same function as Uniswap, a decentralized exchange on Ethereum.

To provide an indication of the difference in size between the two protocols, there’s about $7 billion locked up on Uniswap, according to DeFiPulse, and $5.87 billion locked up on PancakeSwap, according to DeFi Llama. Impressively, Uniswap launched in November 2018, and PancakeSwap launched a little under two years later, in September 2020.

CoinMarketCap lists 1,306 markets for PancakeSwap and 1,524 markets for Uniswap v2 (as of September, the latest Uniswap version is v3).

However, unlike centralized exchanges, which list coins individually according to regulatory restrictions, there are no limits on the number of tokens that can trade on decentralized exchanges like PancakeSwap and Uniswap. As long as the tokens are compatible with the respective blockchains, the protocols can facilitate swaps of any token.

How does PancakeSwap work?

Like Uniswap, PancakeSwap is primarily an automated market maker protocol. This means that, instead of trading against other users, you swap token pairings supplied by liquidity providers. A liquidity provider is someone with a lot of tokens to spare, who funds a pairing of a trade so that people can easily swap those tokens. Liquidity providers earn fees each time someone makes a trade.

Like Uniswap and other automated market makers, PancakeSwap’s algorithms reroute trades between different coins. For instance, if you wanted to swap BNB, the native token of Binance, for CAKE, the native token of PancakeSwap, and there weren’t enough coins in the liquidity BNB/CAKE liquidity pool, PancakeSwap might swap your BNB for another token, BUNNY, and then trade BUNNY for BUSD, and then trade BUSD for CAKE. Although this mechanism means you might have to pay lots of transaction fees, it creates a reliable structure for a decentralized exchange.

PancakeSwap offers other services. People who stake their tokens on PancakeSwap earn LP (liquidity pool) tokens. They can stake these coins in farms on PancakeSwap to earn even more money. The CAKE-BNB LP farm offers returns of 37.16% per year. These tokens can be redeemed for a share of the pool’s assets.

You can also stake tokens in PancakeSwap’s “syrup pools” to earn returns. CAKE’s tokenomics schedule (the way the CAKE economy works) distributes CAKE tokens to syrup pools after a certain number of transactions are processed. For staking CAKE, you can earn SYRUP tokens, which are “basically an IOU that shows how much CAKE you’ve staked in the pool.” This is returned when you unstake your CAKE from the pool.

PancakeSwap also has a lottery system, whereby you can buy a ticket for $5 and win prizes of CAKE. CAKE is a cryptocurrency token that can be sold, in a roundabout way, for cash. As of this writing, each CAKE token is worth $23 and the whole token has a market cap of $4.9 billion. (By comparison, Uniswap’s token, UNI, has a market cap of $18 billion).

There’s a prediction market on PancakeSwap, which lets you predict (bet) whether the price of BNB will rise or fall against a US dollar stable coin. As described by PancakeSwap: “If you enter an ‘UP’ position, and the BNBUSDT ‘Closed Price’ is higher than the ‘Locked Price’ at the end of the 5 minute LIVE phase, you WIN! And if it’s lower, you lose.”

There’s also a kind of ICO system. An ICO, or Initial Coin Offering, is when a new cryptocurrency project sells tokens before it’s completed work on its crypto project. Investors hope that they increase in value. ICOs raised billions of dollars in 2017 and 2018 but the U.S. Securities and Exchange Commission eventually judged lots of these sales to be illegal. PancakeSwap offers Initial Farm Offerings, which lets customers invest in new tokens using CAKE-BNB LP tokens.

PancakeSwap is also working on an NFT marketplace. (NFTs are cryptocurrency tokens that represent ownership over, more often than not, a digital asset, such as a piece of digital art.)

The protocol is decentralized, and although there is an (anonymous) development team behind the project, its community can vote on core decisions with its CAKE tokens. This is what is known as a decentralized autonomous organization. CAKE is a so-called governance token.

How to swap tokens on PancakeSwap

To process a token swap on PancakeSwap, you don’t have to register your account or hand over any form of identification.

To trade on PancakeSwap, you’ll have to get a token that’s compatible with the Binance Smart Chain. These are known as BEP-20 tokens. You can buy one of these—examples include BNB and CAKE—from an exchange like Binance.

Then, send your funds to a wallet. The most popular wallets that PancakeSwap supports include Trust Wallet, MetaMask, Token Pocket, and SafePal. MetaMask is a popular in-browser wallet with over 30 million active monthly users, as of September 2021.

Here’s how to use MetaMask in your browser.

After setting up your MetaMask wallet and sending your BEP-20 funds to your MetaMask’s BEP-20 address, change the MetaMask’s blockchain and connect it to PancakeSwap through PancakeSwap’s website.

Then, click on the token you’d like to swap on the token swap page, and make sure you have enough BNB tokens to cover your transaction fee (you’ll have to pay a network fee to the Binance Smart Chain validators to get them to process your trade).

Confirm the transaction on MetaMask, and, if everything’s a-okay, you should see the funds appear in your MetaMask wallet.

It should be noted that PancakeSwap is thus unregulated and, like any decentralized protocol launched by anonymous developers. That means there’s a level of risk: No government insurance, for instance—although some protocols claim to offer blockchain-based insurance, and other protocols refund their customers in case of a hack.