TL;DR
PancakeSwap is a decentralized exchange (DEX) available in multiple blockchain networks.
It uses an Automated Market Maker (AMM) model, meaning that trades occur through liquidity pools rather than traditional order books.
PancakeSwap offers a wide range 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 redefined the way we trade and invest. With the use of blockchain technology, DeFi platforms can offer increased transparency, autonomy, and accessibility to financial services.
In the early years of DeFi protocols, we’ve seen the emergence of numerous platforms and decentralized exchanges (DEXs). They were initially concentrated on the Ethereum blockchain due to its smart contract capabilities. But we now have several DeFi platforms on a variety of networks, including BNB Chain, Polygon, Solana, and many more.
As blockchains supporting smart contracts, these networks have a growing community of users, developers, and tools for building powerful decentralized applications (DApps). In this article, we’ll take a look at PancakeSwap, a multichain decentralized exchange.
What Is PancakeSwap?
PancakeSwap is a decentralized exchange (DEX) launched in 2020. Initially, it was mainly used for swapping BEP-20 tokens on the BNB Smart Chain (BSC) but has since expanded to other chains.
Today, 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 more.
The PancakeSwap Exchange
The PancakeSwap exchange uses an automated market maker (AMM) model. That means you can trade digital assets on the platform without relying on a centralized exchange. There isn’t an order book where you’re matched with someone else. Instead, you trade against a liquidity pool.
Those pools are filled with other users’ funds. They deposit them into the pool, receiving liquidity provider (LP) tokens in return. They can use those tokens to reclaim their share, plus a portion of the trading fees. In short, you can trade tokens or add liquidity to earn rewards.
PancakeSwap V3
It’s worth noting that PancakeSwap V3 was launched in April 2023, bringing new features and product updates, including non-fungible liquidity positions, customizable price ranges, enhanced liquidity, and higher trading efficiency.
Let’s go through some of the main features of the PancakeSwap exchange.
PancakeSwap Key Features
Liquidity Pools
PancakeSwap's liquidity pools play a crucial role in facilitating token swaps. Users can contribute liquidity to these pools and earn LP tokens in return, which not only represent their share of the liquidity pool but also grant them rewards in the form of trading fees.
Yield farming allows liquidity providers to earn additional rewards, like CAKE tokens, by locking their LP tokens in smart contracts. The introduction of Initial Farm Offerings (IFOs) provides users with opportunities to purchase new tokens during limited-time events.
Token Swaps and Smart Router
Token swaps on PancakeSwap are streamlined with the Smart Router, which intelligently routes trades through various liquidity sources, such as PancakeSwap V3, V2, StableSwap, and market makers on both BNB Smart Chain and Ethereum.
Users can customize their trades, choosing liquidity sources and adjusting routing preferences. The Smart Router ensures optimal trade execution by finding the best prices across multiple pools.
Limit Orders for Desired Prices
PancakeSwap's introduction of limit orders empowers users with more control over their trades. Users can set desired prices for buying or selling tokens when the market reaches a specific limit price or better.
Market Maker Integration
PancakeSwap's integration with market makers on Ethereum and BNB Smart Chain enhances trading efficiency. This means trades can be automatically routed to market makers, offering better execution prices compared to the AMM. Such integration aims to provide users with cost-effective trading options and improved liquidity.
Zap Feature
Traditionally, users who want to provide liquidity to DeFi platforms would have to add a pair of tokens to the liquidity pool. On PancakeSwap, the Zap feature simplifies liquidity provision by enabling users to add or remove liquidity with a single token and a single click.
Users can add liquidity with imbalanced token pairs, and Zap automatically rebalances them to a 50/50 split. When removing liquidity, Zap allows users to receive only one token in the trading pair, streamlining the process.
Connecting to PancakeSwap
You’ll notice if you visit PancakeSwap that many features are inaccessible until you connect your wallet. Click on Connect Wallet, and you’ll be met with a few 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 refer to this guide: Connecting MetaMask to BNB Smart Chain.
If you have connected successfully, you should see your wallet ID in the top right corner.
Adding Liquidity
If you’ve used any AMM previously, then you know the drill. To farm CAKE, you need to first add liquidity to the exchange.
1. Navigate to Trade, click on Liquidity, then click Add Liquidity.
2. Select the token pair that you want to deposit (e.g., BNB and CAKE). Make sure you understand the risks of impermanent loss before adding liquidity to a pool.
3. The platform will automatically select the most popular fee tier.
4. Set the price range you want to provide liquidity. You won’t provide liquidity to trades outside the selected range, so a smaller range tends to be safer.
5. Enter the deposit amount and click Add Liquidity when you are ready.
6. You will have to confirm a few transactions on your wallet to enable the platform to use your tokens, and finally to add liquidity to the pool.
Please check the official PancakeSwap docs for more details on adding and removing liquidity.
Farming
You can also stake your LP tokens to earn CAKE or other assets. To do so, navigate to the Farms tab and select the option that matches your LP tokens.
You’ll need to approve the movement of tokens, which allows the contract to withdraw them on your behalf. When you click Approve Contract, a popup will ask you to confirm the transaction and display a fee.
Once that transaction is confirmed, simply select the amount you want to stake and confirm it. You can navigate away from the page and come back at any time to check how much CAKE you’ve earned – if you want to harvest your rewards at any point, click on Harvest and confirm the transaction.
Lottery
Another thing you can do with your CAKE is enter the PancakeSwap lottery, which is controlled by a smart contract.
Each lottery ticket costs around $5 in CAKE and will give you a random six-digit combination of numbers (e.g., 9-1-3-9-6-2). To win the jackpot, the numbers in your ticket need to match the numbers in the same position as the winning ticket.
What if you don’t match all six numbers? No worries. You can also win rewards if one or more of your numbers are in the same position as the numbers in the winning ticket.
The lottery prizes are defined by the amount of CAKE used to purchase tickets plus unclaimed CAKE from previous lottery rounds. There is also a periodic injection of CAKE from the PancakeSwap treasury.
Non-Fungible Tokens (NFTs)
PancakeSwap also features a marketplace for non-fungible tokens (NFTs), where you can buy, sell, and collect unique assets on the BNB Smart Chain.
Gaming Marketplace
PancakeSwap also features a Web3 gaming marketplace, which is a game publishing platform offered by PancakeSwap in partnership with third-party game developers. For example, the game Pancake Protector was published by the Mobox team.
While the platform is open for game developers looking to publish games, the games are selected based on certain criteria, such as prior experience, relation with PancakeSwap elements, roadmap development, 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 that mean it’s completely safe to use? Not necessarily. Depositing funds into a smart contract always carries the risk of bugs, even for audited and reputable projects. There is also the risk of financial loss that may occur when trading or providing liquidity. Never deposit more than you can afford to lose.
Closing Thoughts
Ethereum may have kickstarted the DeFi trend, but initiatives like PancakeSwap suggest that the wave of innovation will continue to spread to other blockchains.
PancakeSwap has emerged as a versatile and community-driven platform, solidifying its position as a key player in the decentralized finance landscape.
Whether it's through AMM, liquidity pools, yield farming, market maker integration, the Zap feature, or the introduction of limit orders, PancakeSwap delivers a diverse and user-friendly DeFi experience.
Further Reading
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