It is a decentralized exchange developed based on the Binance Smart Chain. It is considered one of the biggest DeFi (decentralized Finance) platforms in the Binance Ecosystem. In the following, you first get to know the way PancakeSwap works, and then you will learn more about this platform.
Short History about the Decentralized Exchange
Since launching the first decentralized exchange in the blockchain ecosystem and digital currencies, a common feature governs this process: they all are funny and straightforward, or at least it seems like that. A simple user interface replaces the candlestick charts, order book, currency pairs, and other complex details governing the centralized exchanges.
This simplicity has demonstrated itself in these platforms’ user interface and function and naming. Most of these platforms have been named after elements such as meme internet or food names like unicorn Uniswap, Sushiswap, and PancakeSwap.
Differences Between Decentralized and Centralized Exchange
The main difference between decentralized exchange and centralized one is how users’ assets are controlled. On centralized exchange (like Binance), users should first deposit their digital currencies to wallets available on the exchange; then register their sell/buy orders online. Finally, the exchange matching engine will link them to trade.
Centralized exchange trading is not done on the chain. However, it is registered in the centralized data platform and will be registered on the blockchain only during assets withdrawal. This process will lead to the speed of transactions in the centralized exchange.
Although this simple mechanism has provided fast and easy trading, it has some flaws. For example, these exchanges hold users’ assets in custody, and their management is centralized and fragile.
It is worth mentioning that decentralized exchanges help remove the flaws of centralized exchanges. These protocols provide the on-chain cryptocurrencies swap, which minimizes manipulation possibilities in the market. There is also no need for the custodial wallet to transfer assets on the decentralized exchange. Each user can directly link their wallet to a clever trade to interact and control their assets.
The first decentralized exchange was built on the Etherium blockchain. Uniswap, Sushiswap, and Balancer are among the most famous cryptocurrencies. These platforms gradually took a significant share of cryptocurrencies tradings and made massive traffic on the Etherium network beside the other DeFi projects.
But, in recent years, because of the low scalability of Etherium blockchain, trading fees increased enormously, so it wasn’t economical anymore. This condition resulted in similar projects like PancakeSwap, based on more scalable blockchains offering fewer fees and more speed trading.
CAKE token is the specialized token of Panckaeswap. Currently, 25 tokens can be paid per each new block. So, every day 30 thousand new blocks are added to the network, which equals 7.500.000 new CAKE tokens. According to the CoinMarketCap, the CAKE token ranking is #84.
How does it work?
PancakeSwap is decentralized in the Binance smart chain having functionality as a Uniswap platform (on the Etherium network). This platform was launched on 20 September 2020 and reached 700million dollars in trading volume quickly. Like Uniswap, PancakeSwap uses liquidity pools and an automated market maker model to manage the trades. In the following, we elaborate on the main elements of the Pacakeswap platform, including liquidity pools, automatic market maker, and CAKE token.
What is Pool Liquidity?
Pool liquidity is a virtual space where users can deposit their desired currencies to trade tokens. The users that deposit their funds are called liquidity providers. Each time the PancakeSwap users pay a trading fee, a large amount of that fee is dedicated to the liquidity provider.
In this method, users can swap their tokens with the available tokens in the pools instead of directly trading. Here, the intelligent contract play as an intermediate between the users and liquidity pools.
Every user can deposit in the PancakeSwap liquidity pool and provide the liquidity of one token pair of, for example, BNB/CAKE, with equal share. These users can receive LP tokens (liquidity provider tokens) in return in similar proportion to the amount of liquidity they have supplied to the pool. They can use these tokens to reclaim their funding and withdraw it.
LP tokens are suitable for distributing assets (accrued fees) among the liquidity providers. The algorithm governs this process stores the earnings for the liquidity provided in LP tokens. The user can withdraw it during swap with real tokens.