PancakeSwap exchange is a decentralised exchange (DEX) that is built on the Binance Smart Chain (BSC).
Operating in a similar sphere to competitors Uniswap and Curve Finance, the PancakeSwap network utilises an automated market maker (AMM) system to provide users with the ability to trade cryptocurrency tokens such as WBNB, CAKE and BUSD. In addition to an exchange, it also offers liquidity pools, farming and a predictions market as well as an NFT platform, with more features being added regularly.
This guide will teach you how to use PancakeSwap, trade in and out of liquidity pools, how the rewards system works and the potential risks involved. PancakeSwap and other DeFi protocols are experimental works in progress. Funds deposited into PancakeSwap or DeFi protocols can be at risk of smart contract vulnerabilities, malicious developers and hacks. PancakeSwap is governed by token holders through a decentralised autonomous organisation (DAO).
PancakeSwap's exchange is built on the Binance Smart Chain (BSC), a version of Ethereum developed by Binance. The exchange sacrifices centralisation in favour of low gas fees – which have plagued Ethereum in recent years.
An automated market maker allows digital assets to be transacted automatically as opposed to a typical central limit order book (CLOB) system that relies on buyers and sellers at certain prices. For its system to function correctly, the PancakeSwap exchange relies on user-generated liquidity pools.
Once users have provided tokens to the platform, the PancakeSwap network will then draw assets from these pools to facilitate trades.
Trading on the PancakeSwap DEX requires a digital wallet like MetaMask or Trust Wallet.
Wallets store digital assets and interact with various blockchains to facilitate their transfer.
MetaMask is available as a browser extension or application that allows users to interact with Ethereum-based applications, like decentralised exchanges.
PancakeSwap is hosted on Binance Smart Chain rather than Ethereum, but since Binance Smart Chain (BSC) is EVM compatible, you can use MetaMask with BSC and any of its applications – such as PancakeSwap.
Slippage is the change in a token's trading price between the time the order is placed and when it is executed. Slippage is most impactful during periods of high market volatility.
PancakeSwap's slippage tolerance function is a good way to mitigate slippage. You can set a threshold where the trade won't execute if the expected price of the asset moves by the set amount.
Users providing liquidity is a key feature of automated market makers – without them, the software algorithm for fast, cheap transactions wouldn't work. To incentivise this, PancakeSwap rewards liquidity providers with the platform's native token, CAKE.
Providing liquidity on PancakeSwap is simple:
The PancakeSwap transaction fee is 0.2%, with 0.17% of that going to liquidity providers.
Select the token pair you wish to add liquidity for using the Liquidity tab.
You can unstake your LP tokens at any time by clicking the minus button next to the pair in the "Farms" section.
Next, go back to the "Liquidity" section and redeem your staked tokens by returning your LP tokens.
You will receive your share of the token pool plus any additional tokens earned from trading fees, which you get for being a liquidity provider.
The PancakeSwap transaction fee is 0.2%, with 0.17% of that going to liquidity providers.
Keep in mind that the number of tokens you receive may be different to what you originally deposited due to impermanent loss.
Once you have your liquidity provider tokens (LPTs), you can then stake them in "farms" to earn additional rewards. Also known as yield farming – by locking up your LPTs in a liquidity pool, you can earn more tokens over a period of time.
The average yearly return on investment is represented by an annual percentage rate (APR) figure for each farm. It is broken down into daily, weekly, monthly and yearly figures. The APR will vary, so active farmers will often move their LP tokens around.
To get involved in yield farming on PancakeSwap, you must have already provided liquidity to a pair of tokens.
The steps for farming on PancakeSwap are as follows:
Some of the available farms and APR rates on PancakeSwap
Syrup Pools are another PancakeSwap incentive for users to provide liquidity.
Users can stake their CAKE tokens to earn a range of additional tokens. These pools are used for community-vetted projects involving the Binance Smart Chain (BSC), where project owners distribute a percentage of their novel tokens to CAKE Holders.
Each pool has a visible APR.
To get involved in a Syrup Pool:
Syrup Pools only require a single token to be staked, but typically have lower APRs than Farms.
When you stake CAKE in a Syrup Pool, your wallet will automatically be provided with a $SYRUP token. This token is intended as a place-holder that shows how much CAKE you've staked in a pool. It is vital that you do not exchange this – if you sell the $SYRUP token, you will not be able to unstake your CAKE.
Providing liquidity can be a fantastic method to generate passive earnings, but as with any investment, it comes with risks.
Impermanent loss is a major risk with providing liquidity to an AMM like PancakeSwap. This is a potential loss incurred by the change in the number of tokens you receive when you take your tokens back out of a pool.
This occurs because liquidity pools operate on a ratio-based algorithm – the value of both tokens (in dollar terms) must remain balanced.
If the value of one token in a pair changes, the ratio of tokens in the pool will be altered. This can result in users withdrawing from the pool with more of one token than the other. This could ultimately result in a loss depending on how the market moves.
Even though PancakeSwap is audited by CertiK, a smart-contract auditor, this does not completely dissolve the risk of using the platform. Systems built on smart contracts always pose a potential risk, as bugs and hackers may result in the total loss of funds.
Staking and farming CAKE are not the only uses for PancakeSwap's LP tokens. You can actually enter a lottery, which works just as any other lottery would. You can buy an entry ticket for one CAKE, which will then provide users with a random four-digit combination,
The jackpot will then be split based on the four winning numbers. You don't need all four to win – just two digits in the correct order will entitle users to a portion of the sweepstakes.
Non-fungible tokens (NFTs) are unique digital assets that are stored on the blockchain. Due to their irreplicable nature, NFTs are a popular method of assigning value to items such as artwork, music and other forms of digital files.
On PancakeSwap, you can trade CAKE to purchase "Pancake Collectibles", which are cute digital figures and artwork. Owners can then keep, display and eventually trade these NFTs.
Initial farm offerings allow users that are staked in specifically supported pools to gain access to newly launched tokens. Owners of CAKE in one of these pools can dedicate a variable amount of their LP tokens to purchasing the novel token.
A new feature of PancakeSwap, LP token holders can stake on whether they think BNB's price will rise or fall over a specified period of time. Winnings have a payout ratio based on the value of each pool.
CAKE is the native token of PancakeSwap and allows users to do the following:
If you would like to purchase CAKE to get the most out of PancakeSwap, you can do so using one of the exchanges below. Compare exchanges on things like payment methods, supported currencies and fees.
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