PancakeSwap is a decentralized exchange (DEX), where you can swap your cryptocurrency for other crypto assets, by tapping into liquidity pools. It is one of the most notable use cases for blockchain technology and one of the biggest DeFi protocols, amongst others like Uniswap and SushiSwap.
In this article, we will explain the basics of PancakeSwap and what sets it apart from the other DEX protocols.
How to get started?
Accessing PancakeSwap is very similar to accessing Uniswap and SushiSwap - you need to connect with your online wallet, like MetaMask. Once you are in, you can do various things, but it's most commonly used for swapping tokens. You can trade your Binance Coin (BNB) and a huge variety of BEP-20 tokens. You can even trade tokens that have not yet been listed on any of the big exchanges or brokers.
PancakeSwap is on Binance Smart Chain
Unlike Uniswap and SushiSwap, PancakeSwap runs on the Binance Smart Chain, instead of Ethereum. With the current gas fees at the time of writing, this makes PancakeSwap a fast and inexpensive alternative to Ethereum-based DeFi protocols.
Be mindful that this also means that you can only trade BEP-20 on PancakeSwap. If you want to trade using your ERC-20 tokens, you will have to wrap them first using the Binance Bridge.
How is liquidity provided?
The DEX needs liquidity to be able to make trades. This liquidity comes from liquidity pools. To provide liquidity, you can either add to an existing pool, or create a new pool. You will need to provide two tokens, since each pool consists of a pair. Creating new pools is usually done for new projects, e.g. when you made your own crypto.
Once you have chosen your pair and added liquidity to the pool, you will receive the FLIP token, which is an LP (Liquidity Pool) token. Every time someone makes an exchange that taps into your pool’s liquidity, you can claim a reward by redeeming your FLIP to receive the tokens you had provided before.
Providing liquidity does however come with risks. For example, when one of your your provided tokens decrease in value a lot. While cryptocurrencies are generally a risky investment already, DeFi protocols are facing a lot of additional risks. Not only because of the market’s volatility but also because they are part of a complex system.
What sets PancakeSwap apart?
Other than the lower gas fees due to it being on Binance Smart Chain, there are multiple differences with the other two major decentralized exchanges.
Uniswap is most known for being the original DeFi liquidity protocol on Ethereum. It is commonly used for easy crypto trading using ERC-20 tokens, and mostly ETH pairs. SushiSwap is actually a fork of Uniswap, governed by a community and is used for token swaps, farming and crypto lending and borrowing.
Unlike Uniswap, PancakeSwap and SushiSwap pay rewards to stakers of their native tokens. You can stake the native token CAKE to earn free tokens, or if you have a higher risk appetite, earn CAKE with Yield Farms. The UNI token is only used for governance of the protocol.
PancakeSwap also offers additional services, including a lottery, a BNB price-guessing game, and the possibility to win NFT collectables.