To cut a long story short, PancakeSwap is a cheap and quick decentralized exchange.
The explosion of DeFi, or decentralized finance, has been able to unlock brand-new financial iterations revolving around inclusion, speed, and autonomy – a sort of combination that the conventional traditional realm lacks.
This is particularly true for the budding DEX (decentralized exchange) industry where users are engaging with independent markets increasingly. The popular blockchain technology anchors these markets.
One prime example of this market is our topic of the hour – PancakeSwap. It is the BNB chain form of a decentralized exchange, such as SushiSwap or SUSHI and UniSwap or UNI.
In this blog, we will look at how PancakeSwap works – without wasting time, let’s get started!
So, What Is PancakeSwap?
As we just mentioned, PancakeSwap is a variant of the decentralized exchange native to the BNB chain.
Simply put, this is one decentralized exchange that shares multiple similarities with well-known platforms such as UniSwap. On UniSwap, users can choose to swap their tokens for other tokens without taking middleman services into account.
The only major difference here is that this decentralized exchange prioritizes BEP20 tokens. BEP20 tokens are a particular token standard first launched by Binance.
The BEP20 token standard is a checklist featuring the functions that brand-new tokens can perform to become compatible with the much broader ecosystem of Binance. The board Binance ecosystem includes wallets, dapp, and several other services.
How PancakeSwap Functions?
For anyone unfamiliar with how decentralized exchanges work, they depend on a special method known as an AMM. The automated market maker or AMM makes it possible for the whole process not to require an intermediary, single company, or order books to make trading possible.
Essentially, there is no requirement for any order-matching procedure. Since traders typically trade against different liquidity pools and not against counterparties, this is true. A liquidity pool here is all about the funds that investors deposit into smart contracts for the purpose of giving liquidity to traders.
With this methodology, purchasers don’t invest time in getting matched with sellers or the other way around. Whenever anyone feels like trading a token for another, they can just deposit the particular token into the pool and get hold of the one they want.
For example, if you feel like changing any particular BEP20 token, like ALPHA, to BNB on this decentralized exchange, then you will have to look for an ALPHA/BNB pool with sufficient liquidity.
In that case, you don’t have to deposit the ALPHA tokens and obtain an amount of BNB automatically, depending on the most recent rate of exchange.
That being said, PancakeSwap does not just cater to traders. You can also act as a liquidity provider or LP.
Then, there is another income-generating opportunity for people on this decentralized exchange. This opportunity is known as yield farming. With this opportunity, you can actually farm a token known as CAKE.
Additionally, you can also win a lottery for correctly figuring out a set of numbers – the winning set will help you to ‘win’ the lottery.
Starting Your Journey On PancakeSwap: A Dummy’s Guide!
Before you can start using PancakeSwap, you will have to come up with a wallet that is compatible with the BNB chain.
The available wallet options for you in this case are as follows:
- Coinbase Wallet,
- BNB Chain Wallet, and
- Trust Wallet
At the same time, you can consider using MetaMask, though you might have to configure your wallet on MetaMask. That way, it can begin to work with any decentralized apps based on the BNB Chain, such as PancakeSwap.
You can easily execute this – you will have to visit the MetaMask home page and access the ‘Settings’ menu. Once you are in the ‘Settings’ section, find the ‘Networks’ option and tap on the ‘Add Network’ button located on the top right section of the page.
After you do this, you will reach a page where you will have to fill in some parameters:
- Block Explorer URL: https://bscscan.com/
- Symbol: BNB
- ChainID: 56
Once you are able to do this, you will be able to connect your wallet on MetaMask to BSC’s mainnet version.
Adding Liquidity On PancakeSwap:
Once a user connects their wallet to the BNB chain, they can start engaging with the different dapps, such as PancakeSwap, adding liquidity to any of the pools present on the platform.
In order to do this, the user has to connect their wallet to PancakeSwap. Now, a user can easily do this – they will just have to click on the ‘Connect Wallet’ option located on the homepage’s top right corner.
After connecting their wallet, a user will have to tap on the Trade option and click on Liquidity. Once the user lands on the liquidity page, they will have to click on the ‘Add Liquidity’ button. And then select the token pair they want to deposit.
Please Note: Users need to deposit both the tokens at a predetermined ratio into the pool.
After this, the user will have to sign this transaction from their wallet. This is not going to cost the user any sum of money. Now, the user will get LP tokens. This indicates the user’s share of the liquidity that they had deposited in the pool of their choice.
Farming On PancakeSwap:
Once a user gets hold of liquidity provider tokens, they can benefit from their holding. To benefit from their holding, they will have to deposit the same into a ‘farm’ of sorts for earning CAKE tokens. FYI, PancakeSwap’s native crypto is CAKE.
Essentially, farms are a staking pool for liquidity providers and enable users to earn extra interest on their holdings.
Staking On PancakeSwap:
It is definitely possible to compound a user’s earnings by just staking their CAKE token on the Syrup pools of the platform.
In order to do this, the user will have to navigate to the Earn drop-down menu and tap on Pools. Here, the user will come across all the available pools, the total amount staked, and the APY (annual percentage yield) of each pool.
Now, the user will choose one pool. Then, the user will move to activate the CAKE staking option on their wallet by tapping on ‘Enable.’ After that, the user will have to enter the number of CAKE tokens they can stake before tapping on ‘Confirm.’ Depending on their chosen pool, their earnings can easily be harvested before getting re-staked automatically in the same pool.
And It’s A Wrap!
PancakeSwap uses the PoSA (Proof of Staked Authority) for verification purposes. The Proof of Staked Authority is a blend of Proof of Authority and Proof of Stake.
As such, the platform does support relatively lower expenses and shorter block times as compared to the PoW consensus model like Ethereum’s. But it does come at a cost – you have to sacrifice a certain percentage of decentralization and network security.
The team behind the PancakeSwap is entirely anonymous. However, it has been able to gain trust within the crypto community, in general, and BSC, specifically. The platform provides reliable services, much like the DEXs located on the AMM model, and as a result, was able to make a name for itself.