Here's a noob's guide to Pancakeswap, a deceptively silly name for the third-largest decentralized crypto exchange.
Updated Apr 9, 2022
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Crypto
Technology
Getting Started
It may seem like crypto has only benefits: decentralization, being your own bank, programmable money—All that sounds great, right? While it has its benefits, blockchain is not all pancakes and syrup. Those who got into Bitcoin and Ethereum early may be well-off, but these days you can't get rich off of crypto unless you already are rich. So, if you're balling on a budget but still want to get into decentralized finance (DeFi), chances are you'll want to learn the ropes on PancakeSwap.
PancakeSwap is a decentralized cryptocurrency exchange similar to Uniswap, but instead of being hosted on the Ethereum blockchain, it lives on the Binance Smart Chain (BNB). The main benefit of PancakeSwap is that it's more economical due to the Binance Smart Chain's cheaper transaction fees and PancakeSwap's competitively low exchange fee.
Platform? | PancakeSwap |
|---|---|
What is it? | Liquidity Protocol & Automated Market Maker |
Token? | CAKE |
Token function? | Liquidity Provision Incentive |
Blockchain? | Binance Smart Chain (BEP20) |
Pros
Decentralized exchange
Liquidity pool farming
Gambling
Economical trading transaction fees
Fast transactions on BNB chain
Cons
Not friendly to new users
Anonymously founded
Only supports BEP20 tokens
Strong ties to Binance
Users must take precautions against scams
PancakeSwap uses an automated market maker protocol where token holders provide the liquidity pairs that traders use to swap cryptos. Liquidity providers are incentivized to stake their cryptos in PancakeSwap to get rewarded with trading fees and CAKE tokens—also known as 'yield farming' with DeFi coins. Traders who use PancakeSwap pay a 0.2% fee on their crypto transactions, with 0.17% going to liquidity providers and 0.03% placed in PancakeSwap's treasury.
To earn CAKE tokens, liquidity providers must stake their liquidity provider (LP) token which represents the pair of cryptos they deposited into the protocol. Staking LP tokens rewards liquidity providers with CAKE in addition to fees they earn at the expense of traders. 40 CAKE tokens are minted every block (approximately every 3 seconds), but only 35.62% percent of new CAKE goes into circulation through liquidity rewards and lotteries after PancakeSwap implemented a new burning mechanism in November 2021 to reduce inflation.
PancakeSwap's interface looks and works like most other decentralized exchanges, but it also offers some extra gambling features like lottery and price betting. While swapping cryptos is virtually as easy as a few clicks, using PancakeSwap requires a Web3 enabled browser, like Chrome or Brave, and connection through browser extension wallets, like Metamask or Binance Wallet.
Most importantly, your crypto assets must be on the Binance Smart Chain in order to use PancakeSwap. This means you must either transfer your assets from the Binance Exchange to your Binance Smart Chain wallet or bridge your assets from another blockchain through a cross-chain solution platform.
While the Binance Wallet was designed for Binance Smart Chain compatibility, connecting to the Binance Chain through Metamask involves a slightly different process. After installing Metamask, you must click on the top right circle and then click settings in the drop-down menu. Then, you must click networks, add network, and fill in the following fields:
Once you have your assets on Binance Smart Chain and have successfully set your browser extension wallet to the Binance Smart Chain network, using PancakeSwap is relatively easy. First, you must connect your browser extension wallet to the PancakeSwap app browser client by clicking "connect wallet" on the top right.
After that, you must go to "trade" in the top menu and then click "swap" in the dropdown menu. Next, you just select the crypto assets you want to trade, with the asset you're selling at the top and the one you're buying at the bottom, and, finally, you just click swap and confirm the transaction on your browser wallet.
There are several ways to earn yield on PancakeSwap, with the main way being staking a pair of tokens, like CAKE and BNB, and then staking the subsequent liquidity pool token. For example, a CAKE and BNB staker is granted CAKE-BNB Liquidity Pool tokens that represent their staked crypto liquidity pair. They can then stake that LP token as well as other LP tokens into a 'yield farm' to earn extra yield in the form of CAKE crypto.
One downside of staking on PancakeSwap is that it's unlikely to be a hands-off strategy for passive income since smart contracts are subject to change. Migrating to another smart contract—like PancakeSwap V2—isn't exactly a user-friendly process and requires PancakeSwap liquidity providers to be on the lookout for announcements and updates that may impact their passive yield strategy.