TL;DR
PancakeSwap is a decentralized exchange (DEX) available on several blockchain networks.
PancakeSwap uses an Automated Market Maker (AMM) model. This means that trading occurs through a liquidity pool, not a regular order book.
PancakeSwap offers a wide variety of products and features, such as token swaps, liquidity pools, yield farming, limit orders, NFTs, Web3 games and more.
Introduction
The decentralized finance (DeFi) revolution has revolutionized the way we trade and invest. By using blockchain technology, DeFi platforms can offer increased transparency, autonomy, and accessibility to financial services.
In the early years of DeFi protocols, there was the emergence of a number of decentralized platforms and exchanges (DEX) that were initially centered on the Ethereum blockchain for its smart contract capabilities. However, there are now several DeFi platforms on various networks, including BNB Chain, Polygon, Solana, and many more.
As blockchains that support smart contracts, these networks have growing communities of users and developers, as well as tools for building powerful decentralized applications (DApps). In this article, we will learn about PancakeSwap, which is a multichain decentralized exchange.
What is PancakeSwap?
PancakeSwap is a decentralized exchange (DEX) launched in 2020. The exchange was initially used primarily to swap BEP-20 tokens on the BNB Smart Chain (BSC), but later expanded to other chains.
Currently, PancakeSwap also supports ERC-20 and other token standards. Apart from BSC, you can use PancakeSwap on other blockchains, such as Ethereum, Polygon, Arbitrum, and others.
PancakeSwap Exchange
The PancakeSwap exchange uses an automated market maker (AMM) model. This means you can trade digital assets on the platform without relying on centralized exchanges. There's no order book to match you with other people. Instead, you trade with a liquidity pool.
The pool is filled with other users' funds. They deposit it into the pool, then receive LP (liquidity provider) tokens in return. They can use those tokens to reclaim their share plus a portion of trading fees. In short, you can trade tokens or add liquidity to earn rewards.
PancakeSwap V3
It is worth noting that PancakeSwap V3 is launching in April 2023 to bring new features and product updates, including non-fungible liquidity positions, customizable price ranges, enhanced liquidity, and higher trading efficiency.
Let's discuss some of the key features of the PancakeSwap exchange.
Key Features of PancakeSwap
Liquidity Pools
PancakeSwap's liquidity pool plays an important role in facilitating token swaps. Users can contribute liquidity to these pools and earn LP tokens in return that not only represent their share of the liquidity pool, but also provide rewards in the form of trading fees.
Yield farming allows liquidity providers to earn additional rewards, such as CAKE tokens, by locking their LP tokens in smart contracts. The launch of the Initial Farm Offering (IFO) provides an opportunity for users to purchase new tokens during a limited time event.
Swap Tokens and Smart Routers
Token swaps on PancakeSwap are simplified with a Smart Router that intelligently routes trades through multiple liquidity sources, such as PancakeSwap V3, V2, StableSwap, as well as market makers on BNB Smart Chain and Ethereum.
Users can customize their trades, select liquidity sources, and adjust routing preferences. Smart Router ensures that trade execution is optimal by finding the best price among various pools.
Limit Order for Desired Price
The launch of limit orders on PancakeSwap empowers users with greater control over their trades. Users can set the desired price to buy or sell tokens when the market reaches a certain limit price or better.
Market Maker Integration
PancakeSwap's integration with market makers on Ethereum and BNB Smart Chain increases trading efficiency. This means that trades can be routed to market makers automatically to offer better execution prices compared to AMM. This integration aims to provide cost-effective trading options and increased liquidity for users.
Zap Features
Typically, users who want to provide liquidity to a DeFi platform must add a pair of tokens to a liquidity pool. On PancakeSwap, the Zap feature simplifies the process of providing liquidity by allowing users to add or remove liquidity with a single token and a click.
Users can add liquidity with unbalanced token pairs, while Zap automatically rebalances them to a 50/50 split. When removing liquidity, Zap allows users to receive only one token in the trading pair, thus simplifying the process.
Connecting to PancakeSwap
When visiting PancakeSwap, you will notice that most features are inaccessible until you connect your wallet. Click Connect Wallet, then you will see several options: MetaMask, Trust Wallet, WalletConnect, Binance Chain Wallet, and other options.
If you are not sure how to connect your MetaMask to the BSC network, please read this guide: Connecting MetaMask to BNB Smart Chain.
If connected successfully, you will see your wallet ID in the top right corner.
Added Liquidity
If you have used AMM before, then you already know the procedure. To farm CAKE, you must add liquidity to the exchange first.
1. Navigate to Trade, click Liquidity, then click Add Liquidity.
2. Select the token pair you want to deposit (for example, BNB and CAKE). Make sure you understand the risk of impermanent loss before adding liquidity to a pool.
3. The platform will automatically select the most popular fee levels.
4. Set the desired price range to provide liquidity. You will not provide liquidity for trades outside the selected range, so smaller ranges tend to be safer.
5. Enter the deposit amount, then click Add Liquidity when ready.
6. You have to confirm some transactions in your wallet so that the platform can use your tokens and finally add liquidity to the pool.
Please check the official PancakeSwap documentation for more details on adding and removing liquidity.
Farming
You can also stake LP tokens to earn CAKE or other assets. To do this, navigate to the Farms tab, then select the option that corresponds to your LP token.
You must approve the movement of tokens in order for the contract to withdraw them on your behalf. If you click Approve Contract, a popup appears that will ask you to confirm the transaction and display the fees.
Once the transaction is confirmed, simply select the desired amount to stake, then confirm. You can leave the page, then come back at any time to check the amount of CAKE you have earned – if you want to harvest your reward at any time, click Harvest, then confirm the transaction.
Voting
Another action you can take with your CAKE is entering the PancakeSwap lottery controlled by a smart contract.
Each lottery ticket costs approximately $5 in CAKE and will provide a random six-digit number combination (for example, 9-1-3-9-6-2). To win the jackpot, the numbers on your ticket must match the numbers on the winning ticket in the same position.
What if the six numbers don't match? Don't worry. You can also win a reward if one or more numbers are in the same position as the numbers on the winning ticket.
The lottery prize is determined by the amount of CAKE used to purchase the ticket plus any unclaimed CAKE from previous lottery rounds. There is also regular addition of CAKE from the PancakeSwap treasury.
Non-fungible Token (NFT)
PancakeSwap also has a marketplace for non-fungible tokens (NFT) that allows you to buy, sell, and collect unique assets on the BNB Smart Chain.
Marketplace Game
PancakeSwap also has the Web3 game marketplace, which is a game publishing platform offered through PancakeSwap's collaboration with third-party game developers. For example, the game Pancake Protector is published by the Mobox team.
The platform is open to game developers who wish to publish games, but games are selected based on certain criteria, such as previous experience, relationship with PancakeSwap elements, development roadmap, and technical and community support.
Is PancakeSwap Safe?
PancakeSwap has been audited by CertiK and is one of the leading platforms in the DeFi space. Does this mean that this platform is safe to use? Not necessarily. Depositing funds into smart contracts always carries the risk of bugs, even for reputable projects that have been audited. There is also a risk of financial loss that may occur when trading or providing liquidity. Never deposit more than you can afford to lose.
Closing
Ethereum may have started the DeFi trend, but initiatives like PancakeSwap signal that the wave of innovation will continue to spread to other blockchains.
PancakeSwap has emerged as a multi-purpose, community-driven platform that strengthens its position as a major player in the decentralized finance space.
PancakeSwap provides a diverse and user-friendly DeFi experience, whether through AMM, liquidity pools, yield farming, market maker integration, the Zap feature, or the presence of limit orders.
Further Reading
What Is Yield Farming in Decentralized Finance (DeFi)?
What is an Automated Market Maker (AMM)?
What is a Smart Contract and How Does It Work?
Disclaimer: This content is presented to you on an “as is” basis for general information and educational purposes only without any representation or warranty of any kind. This content should not be construed as financial, legal, or other professional advice nor is it intended to recommend the purchase of any particular product or service. You should seek advice from appropriate professional advisors. If the article is a contribution from a third party contributor, please note that the views expressed are those of the third party contributor and do not necessarily reflect the views of Binance Academy. Please read our full disclaimer here for further details. Digital asset prices can be volatile. The value of your investment may fall or rise. You may not get back the amount invested. You are fully responsible for your investment decisions. Binance Academy is not responsible for any losses you may experience. This material should not be considered financial, legal, or other professional advice. For more information, read our Terms of Use and Risk Warning.
