PancakeSwap: Yield Farming the Fun Way
July 15, 2021
PancakeSwap is a decentralised exchange (DEX) on the Binance Smart Chain, which is the blockchain created by the centralised exchange Binance.
Visiting pancake.finance feels like being in a rabbit & breakfast-themed game. Not only does this brighten up the experience, but the interface is also incredibly clear and every feature is explained with very few elements.
The Decentralised Exchange
PancakeSwap is actually not just a game, but a DEX with an Automated Market Maker, i.e. an order execution mechanism based solely on smart contracts.
PancakeSwap was created by a group of anonymous developers, thanks to funding from Binance’s Accelerator Fund. It was launched on 20 September 2020, just after SushiSwap.
PancakeSwap aims to be a cost-effective alternative to UniSwap, being based on the Binance Smart Chain (BSC) blockchain, known for its low costs.
Uniswap and Sushiswap, on the other hand, are based on Ethereum, which precisely in September 2020 saw exponential growth in Gas cost, a unit with which smart contracts and ERC-20 token transfers, for example, are paid.
The standard for tokens exchanged on PancakeSwap must instead be BEP-20, the native standard of the BSC.
PancakeSwap also stands out due to the numerous use cases of the native CAKE token and the rich feature offering.
CAKE use cases
You can obtain CAKE with 3 features of PancakeSwap:
- Yield Farms
- Syrup Pools
- The Lottery
Yield farms, or simply farms, are liquidity pools in which you can lock pairs of LP tokens to earn incentives in CAKE.
In Yield Farms, users lock their liquidity into a specific pool, e.g. CAKE-BNB, depositing 50% CAKE and 50% BNB.
Like the exchange, Farms and other PancakeSwap features support only BEP-20 tokens.
These deposited tokens will be used by the exchange to execute orders. In return, the user will receive an APR proportional to the amount deposited. Each Farm has its own APR and multiplier.
It stands for Annual Percentage Rate, and in the context of Yield Farming indicates the percentage of interest that will be earned in a year from a specific instrument, without considering compound interest.
The multiplier, on the other hand, indicates the portion of CAKE allocated to the farm by the protocol, and the APR offered depends directly on the multiplier.
For example, if the multiplier of CAKE-BNB is 40x, it means that for each created block of the BSC, the Farm CAKE-BNB receives 40 CAKE. These 40 CAKE constitute the reserve from which to draw to distribute the APR to liquidity providers.
Syrup Pools are also pools to which you provide liquidity for periodic income, but the difference is that it is staking. You deposit only CAKE in the chosen pool and receive a reward in a new token. The biggest syrup pool is the one where you deposit and receive CAKE. There are many other pools that are time-based, i.e. you can only receive newly launched tokens until a certain date.
Syrup Pools are a great way to promote a new token and distribute it to create an initial user base.
Due to the fact that it is not necessary to deposit 50% of one token and 50% of the other, Syrup Pools have a lower risk percentage. This is because there is no Impermanent Loss.
Impermanent loss occurs when you provide liquidity to a pool, and the prices of the tokens provided vary from the time they were deposited. The greater this price variation, the more you are exposed to impermanent loss. The loss is realised permanently when tokens are withdrawn from the pool.
In addition to using them in Yield Farming, you can use CAKE tokens to actively participate in the project, i.e. by voting on proposals for the improvement and development of PancakeSwap.
The functionality as of June 2021 is disabled due to an ongoing rule change. In general, it is a real lottery with tickets to participate and rewards in CAKE. It is a very attractive feature because of its ease of participation and the high reward.
Team Battles & NFT
With 1.5 CAKE you can also create a personal profile in the form of an NFT and join a team. Being part of a team allows you to participate in Team Battles, i.e. trading battles in which you win rewards in CAKE or the ownership of an NFT.
Other PancakeSwap Features
The Prediction feature is currently in beta and allows you to win rewards in BNB if you correctly predict the performance of the BNB-USDT pair during dedicated rounds.
The Initial Farm Offering (IFO) is another way to get a newly launched token. On PancakeSwap you can only participate in an IFO after you have locked liquidity in the Farm CAKE-BNB.
After taking your tokens as a participation fee, the system will convert the portion of BNB into CAKE which, together with the portion of CAKE already available, will be “burned”.
Burning a cryptocurrency means sending an otherwise usable token to an unusable account. The burn effectively removes tokens from the available supply, increasing its relative scarcity.
The IFO formula creates value for the ecosystem in several ways:
- It increases demand for CAKE and liquidity on the BNB/CAKE Farm, which is the largest.
- Reduces the supply of CAKE through the coin burn, thus allowing deflation.
- Creates an additional incentive for liquidity providers.
- Helps Pancake to attract more partners and their users
After the launch of PancakeSwap v2 in April 2021, the DEX asked its community to vote on a series of proposals regarding the future tokenomics of CAKE.
From a total of four options, the community voted resoundingly in favour of “the big burn” option, which captured over 66% support.
“The big burn” stipulates that the transaction fees paid to perform token swaps (currently 0.25%) must be divided among 3 destinations:
- 0.17% go to the Liquidity Providers.
- 0.03% go to the PancakeSwap Treasury, which funds the project.
- 0.05% goes to the CAKE token Buyback & Burn program.
In traditional finance, it is defined as “A transaction consisting of the repurchase of treasury shares by a listed company”. In crypto projects, it is the repurchase of tokens by the entity that issued them in order to remove them from the circulating supply.
The community knows that coin burning and buyback operations are fundamental in a project that bases most of its functionalities on token distribution. In fact, the coin burn allows to keep CAKE inflation under control, which is constantly increasing, and at the same time allows to keep the coin scarce and therefore valuable.
Developments round the corner
Pancake has several programmes cooking up (or ready to cook). The Prediction functionality will soon be made available in the definitive version, and in general, the gamification of the platform will be improved and enriched.
A big project is Lending & Borrowing, which will make PancakeSwap even more competitive with other AMMs.
Projects that are still far down the roadmap include margin trading and staking on fixed periods to increase rewards.