PancakeSwap: Not just a fork of Uniswap

Original source: Babbitt

Original compilation: The Way of DeFi

The original text comes from Messari, the following is the full text compilation:

At the beginning of this year, "farmers" began to explore DeFi in order to seek higher capital gains. The main playground for DeFi, the Ethereum network, has witnessed explosive transaction growth. Meanwhile, competition has intensified and gas fees have skyrocketed, pushing retail users to alternative networks such as Binance Smart Chain (BSC). Among them, PancakeSwap is the leading decentralized exchange on BSC. With its reward mechanism and ease of use, it stands out from other competitors and becomes one of the key beneficiaries. This report will introduce the rise of PancakeSwap, product offering, token mechanism and risks.

PancakeSwap's Playground: BSC Network

BSC Network is the world's largest exchange Launched by Binance in September 2020. It has smart contract functions and compatibility with the Ethereum Virtual Machine (EVM), allowing developers to easily port projects from Ethereum to BSC. For users, this means that the tools and applications they are familiar with on Ethereum, such as the MetaMask wallet, can be easily configured on BSC.

One of the biggest value propositions of BSC is its cheap gas fee model and fast execution. For example, on May 18th, the average cost of exchanging tokens on Ethereum was ~$40, while on BSC it was ~$0.2. High gas fees are prohibitively expensive for many retail users, and as a result, the BSC network has enjoyed a parabolic rise in almost all key metrics over the past few months. According to the table below, the daily active addresses of the BSC network, that is, the unique addresses that are active on the network as senders or receivers, increased from less than 100 to more than 1 million in May 2021, even surpassing the number of Ethereum The address of Fang network.

In addition, the cumulative unique addresses of the BSC network will rise exponentially in 2021, increasing to more than 70 million during May this year.

In addition, its daily transaction volume also doubled, reaching a peak of 12 million.

Market Leadership of PancakeSwap

PancakeSwap was developed by a small group of anonymous engineers. With cost-effective transaction fees, various products and positive social channel promotion, PancakeSwap has risen to one of the top exchange platforms of the BSC network and the entire Layer 1 network within a few months. The following is a ranking list of decentralized exchanges (DEX) by total trading volume (ranked by total trading volume).

Source: Debank

The chart below shows that PancakeSwap has gained more and more market share over the past few months, reaching 40 as of May 20, 2021 %.

Major decentralized exchanges: 24-hour transaction volume (all chains); source: Debank During the day, the number of active wallets interacting with the PancakeSwap smart contract doubled to 1.79 million, a 65% increase from a week ago. At the same time, the number of transactions on the PancakeSwap platform soared to more than 11.5 million, and the transaction volume more than tripled to $32 billion.

Source: DappRader

Total Value Locked (TVL) is another important indicator for evaluating the adoption of DeFi projects. The total dollar value of the coin. For a decentralized exchange, higher TVL usually means more liquidity and less slippage. As of May 26, 2021, PancakeSwap has a TVL of $7.5 billion, having previously peaked at $10.5 billion.

Source: DefiLlama

In terms of TVL, PancakeSwap still ranks among DEXs on different smart contract platforms despite a drop It was the first, leading Curve Finance by US$1 billion before being sold off in mid-May. However, it now ranks second behind Curve with $200 million. However, TVL is often volatile as capital is mercenary and generally goes to places with the highest yields. The following is the TVL ranking of DeFi applications:

Source: DefiLlama

In addition, other network indicators also show the attractiveness of PancakeSwap. In April 2021, the PancakeSwap website had a total of 26 million visits, ranking 49th globally among SimiliarWeb's investment websites.

Source: SimiliarWeb

Products offered by PancakeSwap

DEXs are One of the most important DeFi applications for each blockchain. Pancakeswap launched with similar functionality to Uniswap, but quickly expanded its offerings. Now it has become a real DEX on BSC. The core products of other DEXs tend to cover two major products: trading and providing liquidity, but PancakeSwap offers more, such as farms, syrup pools, lotteries, and initial farm offerings (IFOs).

PancakeSwap makes income farming acceptable to the public by gamifying the user experience. For example, users can win special NFTs from the marketplace, build profiles, and join other users' teams to complete a task. The above graphics also provide a different experience from other DeFi protocols, which can be more friendly to beginners.

CAKE is the native governance token of the PancakeSwap ecosystem. Users can buy it from exchanges, earn it from PancakeSwap’s farms and syrup pools, or even win it in the lottery. Users can choose to become a liquidity provider (LP) and add CAKE to another token to generate LP tokens. And these can all be staked on the farm portion to earn CAKE. Governance is also another major use, where tokens can be used by participants to vote, for example, to control the minting and burning rate of CAKE tokens.

Below we dive into each of PancakeSwap’s offerings.

Token exchange

PancakeSwap charges a transaction fee of 0.25% for each transaction, of which 0.17% will be rewarded to LPs, and 0.03% will enter the PancakeSwap treasury as system income. PancakeSwap is the most active DEX on BSC. As of May 26, there are 900 coins and 1,800 trading pairs on PancakeSwap v2.

Source CoinGecko

Farm

PancakeSwap’s Liquidity Providers (LPs) can transfer their LP tokens are pledged to farms to harvest CAKE tokens as rewards. Currently, PancakeSwap distributes rewards in more than 100 trading pairs of LP tokens to attract users to provide liquidity for these trading pairs, and ultimately enable the PancakeSwap platform to obtain a better trading experience. Among them, the reward weight of CAKE-BNB is 40 times, and the other is 0.1 to 2 times. The reward weight represents the amount of CAKE rewards each farm gets. For example, if a reward weight of 1 means 1 CAKE per block, then a reward weight of 40 means 40 CAKE per block. The purpose of CAKE-BNB to obtain the maximum reward weight means that the project hopes to attract the largest users and provide the best liquidity for the pair, which will lock some CAKE supply and provide a good way for farmers to get CAKE rewards to exit . The annual percentage rate (APR) for yield farming can range from ten percent to several thousand.

Syrup pool

The syrup pool is equivalent to the token airdrop pool. For other BSC projects with native tokens, offering tokens in the syrup pool is a great way to distribute tokens to retail investors and help increase the visibility of the project, as PancakeSwap is the leading DEX on the BSC network. Projects that want to attract interest in their tokens can apply to give PancakeSwap a certain amount of tokens to be listed in the syrup pool section.

Users can stake PancakeSwap’s CAKE tokens in the syrup pool to mine other tokens. In most cases, the APR on the syrup pool fluctuates around 100%. For CAKE holders, syrup pools provide an additional income channel. This is a win-win solution for PancakeSwap, other projects, and CAKE holders.

Lottery

Users can use CAKE tokens to buy lottery tickets, the selling price of each lottery ticket for 1 cake. The CAKE spent on purchasing lottery tickets will be put into the lottery prize pool. Currently, there are four random numbers on each ticket. When a draw is drawn, users are guaranteed a prize as long as a ticket matches two or more numbers in the correct order.

The prize pool will be divided into four parts:

• 50% of the prize pool Tickets that will be allocated four numbers in the correct sequence
• 20% of the prize pool will be allocated to tickets that match three numbers in the correct sequence
• 10% of the prize pool will be
• The remaining 20% of the CAKE in the prize pool allocated to those lottery tickets that match two numbers in the correct sequence will be burned

Round 498 at the time of writing The total prize pool size of the lottery reaches ~3,100 CAKE. Of these, winners who did not match four numbers, 930 CAKE tokens were awarded to winners who matched two to three numbers, while 620 tokens were burned. The graph below shows the historical lottery pool size and the number of CAKEs burned.

Initial Farm Offering IFO

Projects on the BSC network can raise funds through Pancakeswap's IFO (Initial Farm Offering). Users need to first deposit BNB and CAKE tokens into the BNB-CAKE liquidity pool to obtain LP tokens. These LP tokens can be deposited into specific farms to participate in IFO. To ensure that all retail users have fair access to each IFO, PancakeSwap has two types of offerings: The first is the basic offering, where each user can stake up to $100 worth of BNB-CAKE LP tokens. The other is unlimited sales, in which case there is no limit to the number of LP tokens a user can stake.

Once the IFO is completed, the BNB behind the LP tokens will be delivered to the project raising funds, while the corresponding CAKE tokens will be destroyed. In other words, half of the USD funds raised (in terms of CAKE tokens) will be burned. Take Horizon Protocol’s IFO as an example, which raised $2.5 million worth of LP tokens, of which $1.25 million worth of CAKE tokens were burned.

PancakeSwap Token Economics

PancakeSwap’s unique token economics can be said to attract One of the best reward structures for users. Unlike many tokens such as Bitcoin, CAKE has no supply cap, so APY can continue to rise. To incentivize users to provide liquidity, the protocol mints 40 CAKE tokens per block. Of these 40 tokens, 20 new CAKE tokens are burned immediately, i.e. 20 valid CAKE net minted per block. Of the 20 CAKE tokens injected into circulation, 10 CAKEs go to the syrup pool, while the other 10 go to the Yield Farm and its raffle platform.

PancakeSwap is not unaware of the adverse impact on price due to its infinite supply inflation. As a countermeasure, CAKE holders recently voted to amend its token economic structure in an attempt to reduce the circulating supply, hopefully resulting in more tokens being burned rather than minted.

On April 22, CAKE holders voted to implement a "big burn" mechanism for CAKE, increasing transaction fees from 0.20% to 0.25%. Of this new transaction fee, 0.17% is awarded to LP token holders, 0.03% is awarded to treasury, and the remaining 0.05% will be used for repurchasing CAKE and burning. In addition to this, all CAKE spent on user "profile creation" section, all tokens raised in IFO, 20% of tokens spent on lottery, and 2% of each proceeds in the automatic CAKE pool will also be Used to burn tokens. All burns happen every Monday by sending CAKE to the burn address on-chain.

The latest CAKE token release and destruction mechanism can be summarized as the following figure:

As above As shown in the figure, the effective new supply of CAKE is about 530,000 per day, or about 3.7 million per week, and some circulating CAKE is destroyed every week. For example, on May 11, PancakeSwap reported that it had its largest burn ever, with approximately 5 million CAKE burned. As long as more and more users trade, play lottery and IFO on the PancakeSwap platform, the number of burned CAKEs will increase, which will ultimately benefit the price of CAKEs. Under the action of these mechanisms, the price of CAKE tokens has appreciated a lot in recent months. On May 19, the price of CAKE was about $22, which was more than 20 times higher than the price of CAKE on September 30 last year, which was about $1.

Risk

Some critics believe that there may be wash trading or a large amount of fake activity on BSC , such data are meaningless. Others responded that the volume was due to PancakeSwap’s growing volume and that wash trading on DEXs is difficult since on-chain activity is verifiable. Additionally, PancakeSwap charges 25bps per transaction, which makes forging transactions costly for any user. While it is possible for whales to fake trades, if volumes are indeed faked, slippage will be a key indicator for the market. The way to test for slippage is to use TVL as a quantifiable measure of liquidity. In the case of PancakeSwap, TVL and liquidity grew in tandem.

Another major risk of PancakeSwap comes from the BSC network. The main advantage of BSC is fast transaction execution. However, BSC has experienced congestion caused by a large influx of users, and sometimes users need to increase the gas price to speed up transactions. At the same time, in order to support better performance and higher throughput, BSC developers have made improvements, increasing the gas limit and block time. Nonetheless, BSC relies on 21 validators with PoSA consensus. Under this mechanism, validators eventually become the bottleneck of the network. Even with high-end hardware, they cannot handle parabolic growth of transactions and real-time processing of chain state changes. For example, on May 4, it was reported that the infrastructure on the BSC was unable to operate under the demands of the network, with blockchain nodes falling behind by up to 30 blocks. If BSC cannot solve performance problems through software upgrades in a short period of time, it will inevitably experience growing pains: the loss of users and capital. In fact, it has been observed that the TVL of BSC has dropped significantly in recent days.

Another threat to PancakeSwap is competition from Ethereum's second-layer solutions, such as Polygon, and other first-layer networks, such as Solana and Fantom, which Have near-instant transaction completion at negligible cost. PancakeSwap has its own advantages, but the low fees and high yields of other networks may mean capital outflow for BSC. It is possible that PancakeSwap could be ported to other networks in time, although given its strong ties to Binance, there is no sign of it doing so.

Some critics also say that PancakeSwap is just a fork of Uniswap. However, PancakeSwap's success comes from its creative marketing campaigns, new product offerings, and novel incentive structures. Similar to SushiSwap, the protocol has already demonstrated its ability to grow beyond the Uniswap fork. In fact, in order to maintain its market leading position, PancakeSwap will need to continue to innovate in terms of market expansion and technological innovation.

The last major concern with PancakeSwap is its unlimited CAKE token release mechanism. However, the new developments and proposals mentioned above show that the project and token holders have been taking steps to maintain a balance of liquidity providers that incentivize the platform, while also moderating inflation. Inflation is not an issue at a time when trading activity is expanding. However, if transaction growth and usage weaken, inflation will be a major headwind for price action.

Conclusion

PancakeSwap is building a one-stop DeFi service platform on the BSC network. In addition to token exchange services, it also implements many other auxiliary functions, such as farms, syrup pools, lottery and IFO. Most of them have been quite successful and attracted a lot of user interest. According to data from different sources, PancakeSwap is the well-deserved number one DEX in the BSC ecosystem.

Layer 1 networks and the DeFi platforms on those networks are a dynamic playground that changes very quickly, so it's too early to declare who the ultimate winner is . However, if current trends continue and investors envision a multi-chain future, the BSC network, with its leading DEX, PancakeSwap, will remain an interesting research topic for the foreseeable future.

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