What is PancakeSwap?
PancakeSwap is the leading decentralized exchange (DEX) on the BNB Chain. As of September 2023, it was the largest decentralized application (dApp) on the BNB Chain, with a total value locked (TVL) of about $1.3 billion.
How Does PancakeSwap Work?
Getting started with PancakeSwap is very easy if you have experience using crypto wallets and other DEXs.
You will need:
- A crypto wallet;
- The native crypto of the blockchain you wish to transact on. For example, on the BNB Chain, you will need the BNB token to pay gas fees. Similarly, if you operate PancakeSwap on the Ethereum mainnet, you will need ETH tokens to pay gas fees;
- Cryptocurrencies to exchange or stake.
Setting Up a Cryptocurrency Wallet
You have a plethora of options when it comes to crypto wallets, including MetaMask, Coinbase Wallet, and Rainbow.
Setting up a crypto wallet is pretty straightforward. We recommend you download the mobile application to begin your setup. Crypto wallets like MetaMask can also be downloaded as a browser extension on your laptop.
You can read our latest guide to learn how to set up a MetaMask wallet in detail.
Just remember, whenever you are setting up your crypto wallet, ensure that you store the secret recovery phrases safely. If you forget the passcode to access your wallet, those recovery phrases will be essential for recovery.
Acquiring Tokens to Pay Gas Fees
You need the native token of the blockchain you are transacting on to pay gas fees. Without these tokens, you will not be able to carry out any trades on PancakeSwap.
If you use PancakeSwap on its native BNB chain, you will need BNB tokens in your wallet to pay gas fees.
You can acquire BNB tokens on centralized exchanges like Binance, Coinbase, Gemini, Huobi OKX, and Kraken. Once you acquire these tokens, you will have to send them over to your crypto wallet.
Make sure that you send the BNB tokens using the BNB Chain otherwise, your tokens will be lost in transition. Similarly, if you are planning to use PancakeSwap on Ethereum, you will have to buy ETH on a centralized exchange and send it over to your crypto wallet via the Ethereum network.
Accessing the PancakeSwap Website
Once you have set up your crypto wallet and have acquired tokens to pay gas fees, you can head to the PancakeSwap website pancakeswap.finance.
Connecting Your Wallet to PancakeSwap
Your crypto wallet is like your email account that you use to “log in” to dApps like PancakeSwap. Most crypto wallets like MetaMask and Coinbase Wallet come with an in-app browser to visit and log into various dApps seamlessly.
You can also access Web3 sites like pancakeswap.finance from your laptop browser.
On the home page, click on the “Connect Wallet” button, which will show you a pop-up page with all the compatible crypto wallets available. Select the wallet you use.
If you have downloaded the wallet extension on your laptop browser, simply enter your password when prompted. In some cases, you may be required to scan a QR code via the wallet application on your smartphone.
If you are connecting your wallet for the first time to PancakeSwap, you will be prompted to give the dApp permission to view your public address and wallet balance and to send you requests for transactions. Select the “Allow” button.
You have successfully logged into dApp.
Overview of the PancakeSwap User Interface
PancakeSwap is a feature-loaded DEX. It provides the following features including:
Token Swaps: As a DEX, PancakeSwap allows token swaps where users can trade one crypto for another. These token swaps are enabled by liquidity pools.
Liquidity Pools: Users can deposit their idle crypto tokens into liquidity pools and earn fees from them. Tokens from these pools are used whenever a trader swaps a token on PancakeSwap. The trader pays trading fees, a part of which is paid to liquidity providers (LP).
PancakeSwap Smart Router: This is a smart order routing algorithm that executes trades across multiple pools to find the best price for traders.
Zap: Liquidity is provided in token pairs. For example, a user has to deposit equal values of BNB and USDT to a BNB-USDT pool. Zap is a feature that allows users to provide liquidity by depositing only one token.
StableSwap: StableSwap is a feature that allows traders to trade cryptocurrencies that are closely priced to one another (e.g., stablecoins) with lower slippages and lower fees.
Limit Orders: PancakeSwap has traditional exchange features like limit orders which allow traders to set desired prices at which buy or sell orders are automatically fulfilled.
Yield Farming: Whenever a user provides liquidity, they will receive LP tokens which act as receipts. Users can stake these LP tokens on PancakeSwap to earn staking rewards on them (on top of the trading fees earned from providing liquidity). This is called yield farming.
Syrup Pools: Syrup pool is a feature where users can lock in their CAKE tokens or other compatible tokens for a fixed or flexible term to earn tokens. Users can choose one of three options: stake and earn CAKE, stake CAKE and earn other tokens, stake other tokens, and earn CAKE.
Farm Auctions: Upcoming crypto projects can participate in an auction where projects will bid to win a 10-day incentivized farming campaign on PancakeSwap.
Revenue Sharing: Revenue Sharing is a feature where fixed-term CAKE stakers receive part of the protocol revenue weekly.
Initial Farm Offering (IFO): New projects on the BNB chain can conduct private sales on PancakeSwap.
CAKE Bridging: Cross-chain bridges have enabled PancakeSwap’s native token CAKE to be available on BNB Chain, Ethereum, and Aptos.
ETH Liquid Staking: PancakeSwap introduced a new token called Wrapped Beacon Ethereum (wBETH) to enable liquid ETH staking. The WETH token is created by Binance Earn. Each WETH token represents a staked ETH and its rewards.
Perpetual Trading: PancakeSwap offers the trading of special futures contracts without an expiration date called perpetuals. These financial instruments enable traders to use leverage for trading and hedging.
Trading Rewards: PancakeSwap rewards eligible users and stakers with trading fee rebates.
Prediction, Lottery, and Pottery: DApp has gamified features like Prediction, where users can earn rewards for rightly predicting token price movement. The lottery gives users a chance to win a big prize for a small entry fee. Pottery combines CAKE-staking with a lottery where stakers win the chance to get bigger yields.
Games: PancakeSwap has co-developed a play-to-earn tower-defense-inspired game called Pancake Protectors.
PancakeSwap Private RPC: This feature allows users to utilize a private channel for submitting their on-chain trades to avoid getting front-run by MEV bots.
NFT Marketplace: PancakeSwap has a dedicated non-fungible token (NFT) marketplace for the BNB Chain.
In the next section, we will cover the key features of PancakeSwap in detail.
Swapping Tokens on PancakeSwap
Token swapping on PancakeSwap is straightforward. You simply enter the token you want to sell and enter the token you want to get in return. The DEX will show you the minimum amount of tokens you will receive from the trade and trading fees.
You can adjust the slippage tolerance between 0.1% to 0.5%. Setting a higher slippage tolerance will ensure that your trade is executed more easily during highly volatile and congested markets, however, the difference between your expected and resultant exchange ratio may be wider.
Traders can also adjust the amount of gas fees they want to spend, which will affect the transaction speed.
Under “Customize Routing,” users will find advanced settings that allow traders to choose their liquidity source.
They are the PancakeSwap V3 pool, PancakeSwap V2 pool, PancakeSwap StableSwap pool, and PancakeSwap MM Linked pool. These pools offer varying fee tiers, liquidity conditions, and slippages. We will talk more about this later.
Users can also enable or disable ‘multihops’ and ‘split routing’ under the “Customize Routing” button. They are turned on by default.
- Multihops allow tokens to swap through several liquidity pools to achieve the best price for the trader. Disabling multihop results in direct swaps, which may cause higher slippage.
- Split routing enables token swaps to occur via multiple routes to get the best price for the trader. Disabling split routing may result in higher slippage.
Providing Liquidity to PancakeSwap Pools
A liquidity pool consists of a pair of tokens. For example, the BNB-CAKE pool is made up of the BNB token and the CAKE token.
Traders will use this pool to swap their BNB for CAKE or vice versa. Therefore, a liquidity provider will have to deposit equal dollar amounts of BNB and CAKE when providing liquidity into the BNB-CAKE pool.
In return for providing liquidity, the users will receive a BNB-CAKE LP token, which is redeemed when retrieving the deposited tokens.
Liquidity providers earn trading fees every time a trader facilitates a swap using their liquidity pool. Liquidity providers share trading fees based on the amount of cryptos deposited in the pool. The higher the crypto contributed, the higher the share of the trading fees.
4 Types of Liquidity Pools on Pancake Swap
1. PancakeSwap V3: On the V3 exchange, liquidity providers have control over what price range they want to deploy their liquidity.
For example, when Adam deposits BNB and CAKE into a pool, he can set it up so that this liquidity is only used when the BNB/CAKE price is at a custom range. This way, Adam can concentrate his capital in price ranges where most of the trading is expected to occur, thereby allowing him to earn more fees with lesser capital.
Furthermore, V3 offers four different trading fee tiers:
- 0.01% – This is the lowest trading fee tier reserved for stablecoin pairs. It is the lowest because these cryptocurrencies are less volatile and are considered less risky for the liquidity provider.
- 0.05% – This tier is intended for popular and well-traded cryptos. The higher fees compared to the stablecoin pairs represent the risk of impermanent losses.
- 0.25% – The second-highest fee tier is reserved for less frequently traded cryptos.
- 1% – The highest fee tier is reserved for exotic crypto pairs that are considered highly risky for liquidity providers.
2. PancakeSwap V2: On the V2 exchange, liquidity providers are paid a fixed 0.25% fee on all trading pairs. The V2 exchange houses some of the most popular crypto pairs.
3. PancakeSwap StableSwap: StableSwap pools are designed for closely priced crypto pairs like stablecoin pairing or liquid staking token pairs. Traders pay lower trading fees and experience lower slippage using StableSwap.
4. PancakeSwap MM Linked Pools: It has integrated market makers on Ethereum and BNB Chain to give the best deal to traders. Whenever a market maker quotes a better price than the automated market maker (AMM), trades are automatically routed to the better deal.
Staking and Earning CAKE Tokens
There are several ways to stake your cryptocurrencies on PancakeSwap:
- Users can deposit their CAKE tokens into Syrup pools to earn CAKE or other tokens. Flexible-term deposits earn lower returns than fixed-term deposits.
- Users can also stake their LP tokens to earn extra CAKE yield on top of their trading fees.
- Liquid staking is also possible on PancakeSwap via the wBETH token. The wBETH token is a wrapped version of BETH. It represents staked ether and its rewards. Users can easily convert their wBETH into other tokens on dApp.
Here is important information about PancakeSwap’s native CAKE token:
- CAKE was the 101st biggest cryptocurrency, as of October 2023, with a market cap of over $264 million.
- CAKE initially had no supply cap, but its V2 has capped its maximum supply at 750 million tokens.
- As of October 2023, about 222.7 million CAKE tokens were in circulation.
- About 150 million CAKE tokens are released annually.
- CAKE has a burn mechanism where about 1.01 million tokens are burned daily.
- CAKE is used for rewards, staking, governance, trading fee discounts, and IFO allocations.
PancakeSwap is an integral part of the vibrant BNB Chain ecosystem. Over the years, the BNB Chain has shown that it can keep up with leading blockchain networks like Ethereum.
The support from Binance – the world’s largest crypto exchange by trade volume – has helped the BNB Chain and PancakeSwap grow into a formidable force.
Now that PancakeSwap has expanded into other blockchains like Ethereum and Base, we can expect it to become a significant name in the Web3 world.