PancakeSwap and its native token CAKE may conjure up ideas of desserts and breakfast foods but the Binance Smart Chain based DEX is a serious contender in the DeFi landscape. Providing a decentralized platform to trade cryptocurrencies online and surpassing most others in terms of trading volume and currencies offered, PancakeSwap has seen a massive growth in user adoption since its launch. What are the use cases of its native token, CAKE?
What is PancakeSwap?
PancakeSwap is an open-source Decentralized Exchange (DEX) blockchain platform built on the Binance Smart Chain. It allows users to trade different BEP-20 tokens based on the Binance Smart Chain securely and efficiently without an intermediator while retaining user privacy.
The trading is managed by smart contracts – these are self-executing programs with terms of agreement written directly into the code. This assures security and the terms of the trade are automatically enacted removing the need for brokers. It is audited by Certik, a smart contract security firm which helps promote trust in the exchange.
It has a native BEP-20 token, CAKE. This is used on the platform for a wide variety of functions, staking, farming, governance, lottery, syrup pools, and more. There is no fixed max supply, instead it follows a deflationary model and tokens are burned to reduce supply.
PancakeSwap manages several pools of cryptocurrencies to maintain liquidity and facilitate decentralized trading. Essentially users trade with the pools rather than specific individuals.
PancakeSwap was founded by an anonymous group in September 2020 and built on the Binance Smart Chain. As such it offers much cheaper transaction fees than the Ethereum network and its trading fees of 0.2% are much lower than the industry standard of 0.3% when applied to large trades.
It has a strong focus on liquidity within its exchange platform. As a result, it has become one of the leading decentralized exchanges available on par with Uniswap, a decentralized exchange platform on the Ethereum network.
PancakeSwap Use Case: Governance
Holding CAKE tokens allows the user to participate in the governance of PancakeSwap. As a community-governed platform, proposals come from either the core PancakeSwap Team or from the community. These proposals are then voted on using the PancakeSwap voting portal.
Any holder of CAKE can participate in the governance of PancakeSwap by voting on existing proposals or creating their own proposals which can be discussed on various forums. Voting power is proportional to the number of CAKE tokens a user holds.
PancakeSwap implements a form of on-chain governance whereby voting is done within the platform and changes are enacted directly onto the blockchain code. This means the community comes to a consensus and the changes are carried out automatically once the proposal is approved. This prevents hard forks within the network and provides stability for the platform.
One drawback of this system is that a large token holder or whale can be a deciding vote or influence voting hugely. In a recent vote on farming proposals in April 202, a single whale voted against the proposal and blocked its action. The whale had 94,500 votes according to the proportional voting system implemented in PancakeSwap’s governance. This shows the limitations of some forms of decentralized governance and the ability of whales to manipulate governance mechanisms.
PancakeSwap Use Case: Staking in Syrup Pools
CAKE holders can stake their tokens in Syrup Pools and earn tokens as a reward. This is the most direct form of staking provided by PancakeSwap and enables users to earn rewards passively. It has slightly lower rewards than other forms of staking within the PancakeSwap platform. Users must stake their tokens for at least 72 hours before gaining rewards.
There are many different types of Syrup Pools and the rewards vary with each pool. The most commonly used pool is the Auto CAKE pool. CAKE holders stake their tokens and receive CAKE tokens in return. These tokens are automatically staked in the pool once generated allowing compound returns. Other Syrup Pools require users to manually stake any generated rewards.
Users can also stake CAKE coins in pools to earn other tokens from the Binance Smart Chain. Examples include FINA, QI and ZOO tokens. These pools help maintain liquid reserves of different tokens on the PancakeSwap exchange. So holders of CAKE can earn both CAKE tokens and other tokens by staking their CAKE tokens within this system.
PancakeSwap Use Case: Staking in Liquidity Pools
PancakeSwap follows an automated-market maker model. In simplest terms this means rather than trading with a specific user, you trade against a reserve called a liquidity pool.
In centralized exchanges, the company acts as a middle man in a trade and has a reserve of their own funds to trade against. Instead, PancakeSwap facilitates trading without an intermediary by maintaining liquidity pools. These are large pools of BEP-20 token pairs that users can trade against to purchase one of the tokens in the pool. So if a user has CAKE and wishes to buy BNB, they would trade against the BNB-CAKE liquidity pool.
As the exchange is decentralized, these pools are not made from the platform’s reserves. All the liquidity pools on PancakeSwap are filled with other users’ funds. Users stake tokens in pairs into the pool and receive liquidity provider (LP) tokens in return. These can be used to reclaim their initial tokens plus a portion of the trading fees at a later stage. Trading fees are approx 0.2% with 0.17% going back to the liquidity providers.
So if a user has both CAKE tokens and Binance (BNB) tokens, they can stake the two in the BNB-CAKE liquidity pool. They will receive BNB-CAKE LP tokens in return until they wish to cash out. Then they can trade the LP tokens for their BNB and CAKE tokens as well as receiving a portion of the fees from BNB-CAKE trades that occurred while they had staked their tokens.
However you need to stake a 50-50 proportion of two coins. So the user must hold CAKE tokens and another PancakeSwap-accepted cryptocurrency to earn rewards from staking in liquidity pools.
Staking in Farms
These Liquidity Provider (LP) tokens generated by staking tokens can also be staked to generate more passive income in the form of yield farming. So not only does staking in liquidity pools generate rewards in the form of trading fees, the LP tokens that you receive in return for your staked coins can also be staked again to receive more rewards in the form of CAKE tokens. This is designed to incentivize providing liquidity across the exchange.
Once a user holds LP tokens these can be staked in a corresponding farm (so a holder of BNB-CAKE LP tokens can stake them in a BNB-CAKE farm). This will generate CAKE tokens in return.
Initial Farm Offerings
They can also be used in Initial Farm Offerings. Similar to ICOs, these are fundraisers for new DeFi projects that have gone through vetting by PancakeSwap. Users stake LP or CAKE tokens to gain access to new projects and then the staked tokens will be exchanged for the new token. Developers of the new project then receive the staked tokens as funding for their project.
PancakeSwap Use Case: Lottery
PancakeSwap runs a lottery every 12 hours on its platform. Users can purchase a lottery ticket using CAKE tokens (approx $5), this gives you the option to select a 4 digit combination of any numbers from 1 to 14 or have a random selection made. Every ticket purchased contributes to the lottery pool. To maintain a high value pot, over every 4 days, 20,000 CAKE is also injected into the pool.
The jackpot is 50% of the entire pool and the winner needs to have the correct order and combination of numbers. Smaller prizes can be won by having some of the numbers in the correct positions. If prizes aren’t claimed, the pot continues to the next lottery round.
PancakeSwap’s Emission Rate and Inflation Issues
PancakeSwap has no fixed supply and tokens are generated at a very high rate. While a certain amount is burned through different channels to manage inflation, it must be noted that there is a much larger generation of tokens than burned tokens at the moment. Around 1,152,000 CAKE tokens are issued every day and 787,600 burned. This means the supply of CAKE grows by 364,400 daily.
This is designed to incentivize user adoption, staking for liquidity and to provide rewards. However this may lead to a dilution in the value of the CAKE token as the amount of tokens increases. The PancakeSwap community has voted on several proposals to reduce the amount of tokens issued and delivered as rewards to try to combat this but only time will tell if the value of CAKE will drop over time due to over-saturation.
CAKE as a Cryptocurrency
PancakeSwap has become a hugely successful DEX with over 2.8 million monthly users and over $12 billion staked. It has proven itself as a leading decentralized exchange with much faster transaction times than its main competitor, Uniswap on the Ethereum blockchain. Its native token CAKE has shown more use cases than Uniswap’s UNI. UNI is solely a governance token while CAKE provides many ways to generate passive income within PancakeSwap as a staking token.
The high emission rate of CAKE could lead to this being a bubble for the market. CAKE has little use outside of the PancakeSwap platform, however this is intentional as the CAKE token is designed for providing liquidity and encouraging user adoption and participation. CAKE is not used as a form of smart money for everyday e-commerce but has helped create the liquidity necessary for a decentralized exchange and can be used to generate passive income by staking.