Since PancakeSwap was launched in September 2020, it took the crypto space by storm and eclipsed its more established peer, Binance DEX. This isn’t surprising, given the sweet deal PancakeSwap offers: you can trade BEP-20 tokens on a decentralized platform quickly and conveniently.
It was a hit. These days, it’s not uncommon to see trading volumes of over $100 million in a single day. And despite many other formidable decentralized exchanges (DEX), PancakeSwap seems to hit the sweet spot, acquiring a 2.8 million-user base and a total value locked (TVL) of almost $10 billion.
PancakeSwap: The platform
At its core, PancakeSwap is a decentralized platform native to the BNB Chain where users can swap BEP-20 tokens. Swapping—the process of trading a token for another token—is a crucial activity among many crypto users. In the past, most users had to convert their tokens into fiat money, which they would then convert into the desired token. This approach is inconvenient and generates two layers of transaction fees.
An exchange platform like PancakeSwap simplifies the process. It allows you to swap two tokens directly. And with thousands of crypto coins out there, these platforms eliminate a lot of fuss and confusion.
There’s a distinct characteristic that makes PancakeSwap stand out from other exchange platforms: its AMM model.
Automated Market Maker
Because it’s a decentralized exchange, PancakeSwap uses an automated market maker (AMM) design. Under this model, there’s no order book that matches you with another user, nor is there a third-party company that facilitates trading. There’s no order matching system that pairs a seller with a buyer. Instead, you trade against a liquidity pool.
A liquidity pool is a pool of tokens locked in a smart contract. If a user (also called a liquidity provider) wants to swap on PancakeSwap, they must deposit their token in a relevant liquidity pool and get liquidity provider (LP) tokens in return. The platform earns money by taking a percentage of the trading fees.
Other PancakeSwap features
Apart from swapping, PancakeSwap also enables farming, staking, and even lottery betting. These features allow you to earn passive income, making PancakeSwap an attractive choice compared to other DEX platforms.
Also known as liquidity mining, yield farming is a technique where users lock up their crypto in exchange for rewards. In PancakeSwap, LPs can farm its governance token, CAKE. Some LP tokens used to farm CAKE are CAKE-BNB LP; BETH-ETH LP; LINK-BUSD LP; and USDC-BUSD LP.
So when users lock up any of these LP in a “farm” (special liquidity pools used to farm CAKE), they’ll earn passive income in the form of CAKE, which they can convert into fiat money or other cryptocurrencies. They reap rewards without lifting a finger.
Staking is another passive income technique that’s similar to yield farming. The difference, in the PancakeSwap context, is that you lock up the CAKE you earned from farming, instead of the LP tokens you swapped earlier. You lock the CAKE in SYRUP pools, which are special liquidity pools designed for the purpose of staking CAKE. You earn more CAKE in return.
As you’ve noticed, you've compounded your earnings. It started with a handful of tokens swapped for LP tokens, which was used to farm CAKE, which was then staked to earn even more passive CAKE. But it doesn’t stop there—you can also try your luck with the PancakeSwap lottery.
A ticket on the lottery costs 10 CAKE and gives you a four-number combination. To win half the lottery pool, your ticket must match all the numbers in the exact order, on the winning ticket. It’s a huge reward, but there’s a lot at stake, too.
These exciting features are what made PancakeSwap a better alternative to run-of-the-mill DEX platforms in the DeFi-crypto space. The convenience of swapping drew people to the exchange, and the possibility of passive income was the cherry on top.