What Is PancakeSwap and How Does It Work?

DeFi, or decentralized finance, is a way for investors to generate income from peer-to-peer financial transactions. DeFi platforms offer investors the opportunity to put their digital assets to work by providing liquidity to other investors. Doing this can be an easy way to generate passive income.

PancakeSwap is an example of a DeFi platform that allows investors to deposit cryptocurrencies into liquidity pools. Other popular DeFi platforms include Uniswap, Sushiswap and Binance. This article will cover what PancakeSwap is, how it works, and the different ways investors can earn passive income using it.

What is PancakeSwap?

PancakeSwap is a decentralized exchange that allows users to trade coins without the need for an intermediary. It is part of the broader DeFi ecosystem that allows individuals to conduct financial transactions directly with each other instead of going through a traditional institution such as a brokerage firm.

The platform is based on Binance Smart Chain where investors exchange BEP-20 tokens. This is similar to other decentralized exchanges like Uniswap.

One of the advantages of PancakeSwap is that it is based on Binance and not Ethereum and therefore is not subject to the same high gas fees.

Gas is essentially the transaction fee charged to process a transaction on the blockchain, and on a popular blockchain network like Ethereum, the demand (and associated fees) can skyrocket. However, Binance is a different blockchain with a different consensus mechanism. This makes coin exchanges on PancakeSwap cheaper and is one of the reasons why it has become so popular with investors.

More information >> Ethereum Gas Fees: Why They Are a Problem for Investors and Traders

What is a DEX?

A DEX, or decentralized exchange, is a peer-to-peer marketplace where users can trade cryptocurrencies with each other. Unlike the stock market, for example, investors do not need an intermediary to facilitate trades on their behalf.

This is because trades that occur on a DEX are automatically executed using smart contracts. It is basically a series of functions that can execute commands automatically without human help.

Unlike working through a centralized exchange like Coinbase or Crypto.com, trades that occur on decentralized exchanges are usually non-custodial. Users are responsible for maintaining their own wallets and protecting the private keys of those wallets.

While this generally gives users more autonomy to make financial decisions, it also comes with its own risks. If an investor loses their private key, their portfolio assets will be irrecoverable.

How does PancakeSwap work?

PancakeSwap is an AMM (or Automated Money Generator) that allows users to provide liquidity directly to other users. They can do this by depositing their assets into a larger pool from which other investors can withdraw.

In most traditional stock exchanges, investors must wait to be matched with another investor through an order book before they can make a trade. Basically, a seller has to wait to meet a buyer who wants to buy a security at the same price. However, on PancakeSwap and other DEXs, investors can make immediate trades from the pool without waiting.

Investors can generate income simply by providing liquidity. Users who add liquidity to PancakeSwap receive tokens from liquidity providers called CAKE-BNB.

CAKE is PancakeSwap’s native cryptocurrency token and BNB is Binance’s native cryptocurrency. Holders of both are eligible to receive a portion of the trading fees collected on the platform. Whenever a seller makes a trade, they pay a 0.25% trading fee. Of this fee, 0.17% is allocated to liquidity providers in CAKE-BNB.

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To participate in a decentralized platform, investors “lock” their cryptocurrency into smart contracts. Investors earn a high interest APY for staking their cryptocurrency in the same way that an investor would earn a higher interest rate for setting aside their money in a certificate of deposit instead of a traditional savings account.

In order to participate in PancakeSwap, investors must first provide liquidity to the platform. Investors can earn CAKE by engaging in other income-generating activities such as betting and yield farming. PancakeSwap also hosts a lottery on the platform that users can play with CAKE to generate even bigger returns.

CAKE tokens can be wagered in so-called high-performance betting pools Pools of syrup.

In exchange for staking or closing their PASTIS in these groups, investors receive even more CAKE. This is a great way for users to earn passive income, allowing investors to grow their CAKE holdings and increase the value of their original investment over time.

Read more >>Crypto Staking and Loans: Everything You Should Know

Performance farming

Yield Farming is similar to betting, but it involves strategically staking digital assets in high APY pools to get the highest possible return. A yield farmer is an investor who moves digital assets from one liquidity pool to another in order to “harvest” a return from liquidity pools that offer high APYs. This is similar to moving a checking account from one bank to another to benefit from a higher interest rate.

To generate passive income through yield farming on PancakeSwap, an investor must provide liquidity to the exchange and stake their CAKE on high yielding APY farms. They will be able to move their assets as rates change.

A key difference between yield farming and regular staking is the risk of impermanent loss. Every time you move assets around, you run the risk of selling them for less than you originally bought them for. Cryptocurrencies in general are volatile assets, meaning their prices fluctuate frequently. When an investor moves CAKE to a PancakeSwap yield farm, they risk withdrawing less money than they originally invested if the price changes.

Performance farms generate a higher reward than syrup pools. But as with most investments, higher potential returns come with higher risk.

lottery

One thing unique about PancakeSwap is their lottery on the platform. The lottery allows investors to buy lottery tickets to win prizes paid in the form of CAKE tokens.

As with the Powerball lottery, PancakeSwap users can purchase a lottery ticket for 10 CAKE tokens. The ticket gives users a random combination of four digits of numbers. If a user’s ticket numbers match the winning lottery ticket, users can win the jackpot or 50% of the lottery total.

Each lottery round lasts about six hours and users can play as many times as they want. Although playing the lottery is not as passive as betting, it gives users the opportunity to put their PASTIS to work potentially winning a huge jackpot.

Is PancakeSwap safe?

No investment is considered completely safe, especially when it comes to cryptocurrencies. However, when it comes to DEX, PancakeSwap is considered to be on the safer side.

One of the reasons is that PancakeSwap has a large user base, which means other users are constantly injecting new liquidity into Syrup Pools, making it easy for an investor to withdraw their assets at any time.

PancakeSwap is also regularly audited by CertiK and Slowmist. These are two blockchain security companies that routinely assess how well PancakeSwap can withstand cybersecurity threats and exposure to hackers.

One thing worth noting is that there is an ongoing Department of Justice investigation against its parent platform, Binance. While the outcome of this probably won’t affect PancakeSwap too much, the platform is based on the Binance smart chain.

Read our Binance review here >>>

Despite PancakeSwap’s good reputation, investors in any decentralized exchange are still exposed to risk if they lose their private keys or if their wallets are hacked.

Pros and Cons of PancakeSwap

While there are benefits to using a decentralized exchange like PancakeSwap, it is important to assess the risks to ensure investors make the right investment decisions.