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DeFi — or decentralized finance — is a way for investors to generate revenue from peer-to-peer financial transactions. DeFi platforms give investors the opportunity to leverage their digital assets by providing liquidity to other investors. This can be an easy way to generate passive income.
PancakeSwap is an example of a DeFi platform that allows investors to deposit cryptocurrencies into liquidity pools. Other popular DeFi platforms include Uniswap, Sushiswap, and Binance. This article describes what PancakeSwap is, how it works, and how investors can use it to generate passive income.
The short version:
- PancakeSwap is a decentralized exchange that allows investors to generate income from crypto assets.
- Users providing liquidity can facilitate crypto swaps with other users, eliminating the need to find buyer/seller pairs.
- Investors can generate additional income by using CAKE tokens in liquidity pools or yield farms.
- PancakeSwap is generally considered a safe exchange due to routine third-party checks.
What is pancake swap?
PancakeSwap is a decentralized exchange that allows users to trade coins without the need for an intermediary. It is part of the broader DeFi ecosystem, which allows individuals to conduct financial transactions directly with each other rather than going through a traditional institution like a brokerage firm.
The platform is based on Binance Smart Chain, where investors exchange BEP-20 tokens. This is similar to other decentralized exchanges like Uniswap.
An advantage of PancakeSwap is that it is based on Binance and not Ethereum and is therefore not subject to the same high gas fees.
Gas is essentially the transaction fee charged for settling a transaction on the blockchain, and on a popular blockchain network like Ethereum, demand (and associated fees) can skyrocket. However, Binance is a different blockchain with a different consensus mechanism. This makes coin swaps cheaper on PancakeSwap and is one of the reasons why it has become so popular with investors.
Learn more>> Ethereum Gas Fees: Why They’re a Problem for Investors and Traders
What is a DEX?
A DEX — or decentralized exchange — is a peer-to-peer marketplace that allows users to trade cryptocurrencies with each other. Unlike on the stock exchange, for example, investors do not need an intermediary to facilitate the exchange on their behalf.
This is because trades that take place on a DEX are executed via smart contracts themselves. These are essentially a set of functions that can run commands automatically without human help.
Unlike working through a centralized exchange like Coinbase or Crypto.com, trades that take place on decentralized exchanges are typically not custodial. Users are responsible for maintaining their own wallets and protecting the private keys to those wallets.
While this generally gives users more autonomy to make financial decisions, it also comes with its own set of risks. If an investor loses their private key, the assets in their wallet are irretrievable.
How does PancakeSwap work?
PancakeSwap is an AMM – or Automated Money Maker – that allows users to provide liquidity directly to other users. They can do this by putting their wealth into a larger pool for other investors to withdraw from.
On most traditional stock exchanges, investors have to wait until they are matched with another investor via an order book to make a trade. Essentially, a seller must wait to be matched with a buyer who wants to buy a security at the same price. However, with PancakeSwap and other DEXs, investors can take trades from the pool instantly without waiting.
Investors can generate income simply by providing liquidity. Users who add liquidity to PancakeSwap will receive liquidity provider tokens called CAKE-BNB.
CAKE is PancakeSwap’s native cryptocurrency token and BNB is Binance’s native crypto. Holders of both are entitled to a share of the trading fees charged on the platform. Whenever a seller performs a swap, they pay a trading fee of 0.25%. Of this fee, 0.17% is allocated to liquidity providers in CAKE-BNB.
Mark out
To participate in a decentralized platform, investors “lock” their cryptocurrency in smart contracts. Investors earn a high-yield APY for staking their cryptocurrency, just as an investor would earn a higher interest rate by putting their money in a certificate of deposit rather than a traditional savings account.
In order to participate in PancakeSwap, investors must first provide liquidity on the platform. Investors can earn CAKE by engaging in other income-generating activities such as staking and yield farming. PancakeSwap also hosts an on-platform lottery that users can play with CAKE for even bigger wins.
CAKE tokens can be staked in so-called high-yield staking pools syrup pools.
In exchange for committing or locking their CAKE in these pools, investors are compensated with even more CAKE. This is a great way for users to earn passive income, allowing investors to grow their CAKE holdings and grow the value of their initial investment over time.
Read more>>Crypto Staking and Lending: Everything You Should Know
yield farming
Yield farming is similar to staking, but involves strategically staking digital assets into APY pools to generate the highest possible yield. A yield farmer is an investor who moves digital assets from one liquidity pool to another in order to “harvest” a yield from liquidity pools that offer high APYs. This is similar to switching a checking account from one bank to another to take advantage of a higher interest rate.
In order to generate passive income through yield farming on PancakeSwap, an investor must provide liquidity to the exchange and invest their CAKE in farms with high APY yields. They can move their assets if interest rates change.
A key difference between yield farming and regular staking is the risk of temporary loss. Every time you move assets, you risk selling them at a lower price than you originally bought them. Cryptocurrencies are generally volatile assets, which means their prices fluctuate frequently. When an investor moves CAKE into a PancakeSwap yield farm, they risk withdrawing less money than they originally put in if the price changes.
Yield Farms generate a higher reward than Syrup Pools. But as with most investments, higher potential returns come with higher risk.
lottery
Something unique to PancakeSwap is the on-platform lottery. The lottery allows investors to purchase lottery tickets to win prizes that are paid out in the form of CAKE tokens.
Just like the Powerball lottery, PancakeSwap users can buy a lottery ticket for 10 CAKE tokens. The ticket gives users a random four-digit number combination. If the numbers on a user’s ticket match the winning lottery ticket, users can win the jackpot or 50% of the total lottery pool.
Each lottery round lasts around six hours and users can play as many times as they like. While playing the lottery isn’t as passive as wagering, it does give users the opportunity to capitalize on their PIE by potentially winning a big jackpot.
Is PancakeSwap safe?
No investment is considered completely safe, especially when it comes to cryptocurrencies. However, when it comes to DEXs, PancakeSwap is considered to be on the safe side.
One reason is that PancakeSwap has a broad user base, meaning other users are constantly adding new liquidity to syrup pools, making it easy for an investor to withdraw their assets at any time.
PancakeSwap is also regularly audited by CertiK and Slowmist. These are two blockchain security firms that routinely rate how well PancakeSwap can withstand cybersecurity threats and hackers.
It is worth noting that the Justice Department has an ongoing investigation into its parent platform, Binance. While the outcome is unlikely to affect PancakeSwap too much, the platform is built on the Binance Smart Chain.
Read our Binance review here >>>
Despite PancakeSwap’s strong reputation, investors on any decentralized exchange are still at risk if they lose their private keys or if their wallets are hacked.
Pros and Cons of PancakeSwap
While there are benefits to using a decentralized exchange like PancakeSwap, it’s important to assess the risks to ensure investors are making the right investment decisions.
advantages
- Trades on Binance come with lower fees than other Ethereum-based DeFi platforms
- Users have the opportunity to earn income from providing liquidity, staking, yield farming and playing the lottery
- PancakeSwap is strictly audited by third-party blockchain security firms
Disadvantages
- Investors may experience temporary losses
- Investing in high-yield pools involves more risk than providing liquidity or staking
- Binance is not readily compatible with popular hot wallets
The Takeaway: Should You Use PancakeSwap?
PancakeSwap is one of the most popular and user-friendly AMMs in the DeFi space. It allows investors to leverage their digital assets by generating revenue from staking, yield farming and lottery games.
Users considering getting into PancakeSwap should be aware of the advice for relatively volatile investing: Don’t invest more than you’re willing to lose.
While there is a growing number of AMM platforms, PancakeSwap is based on Binance, which costs less than other Ethereum-based platforms. This can represent significant cost savings for investors and allow them to increase their returns.
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