PancakeSwap (CAKE)

PancakeSwap is an Automated Market Maker (AMM) and decentralized exchange (DEX). You can swap one crypto for another and deposit crypto into pools to earn interest.

Launched in 2020, it is unknown who exactly is behind PancakeSwap. Some people speculate that it is Binance – one of the largest crypto exchanges in the world.

Unlike Compound that accepts Ethereum tokens, PancakeSwap allows you to deposit tokens that run on the Binance Smart Chain – called BEP20 tokens.

CAKE is the native token of PancakeSwap. You can earn CAKE when you deposit crypto into one of the “syrup pools” or yield farms.

Difference Between Farms and Pools

Yield Farming

Yield farming is when you provide liquidity to a liquidity pool. When you trade one crypto for another on PancakeSwap, those coins come from liquidity pools. Say you want to swap BNB for CAKE – there has to be enough of BNB and CAKE in the BNB/CAKE pool for that swap to happen. If there’s no liquidity, the trade can’t happen. That means PancakeSwap has to keep those liquidity pools full. To incentivize people to deposit coins into these pools, PancakeSwap rewards people who do.

In PancakeSwap, you must deposit equal ratios of the two cryptocurrencies within that liquidity pool. You will receive CAKE plus interest for however long you keep your crypto in it.

The CAKE-BNB farm requires you to deposit an equal amount of CAKE and Binance Coin into the liquidity pool e.g $50 worth of CAKE and $50 worth of BNB. In exchange, you will receive interest in CAKE. Interest rates in farms are typically higher than in syrup pools, but they come with greater risk.

The risk of farming is impermanent loss. This happens when the price of the cryptocurrencies in the liquidity pool changes too much from when you deposited into the pool. The larger the change, the heavier the loss. If you would have earned more profit by simply holding the coins rather than putting them in a liquidity pool, that is considered an impermanent loss.

Syrup Pools

Syrup Pools are less risky because you only need to deposit one crypto to receive CAKE in return. Therefore there is no risk of impermanent loss. If you deposit CAKE into the CAKE syrup pool, you will receive interest paid in CAKE. This interest compounds, so over time, you could see your investment grow.

Syrup Pools and Interest Rates

The more CAKE staked in the syrup pools, the lower the interest rate becomes. You’ll notice that the interest rate in the pools slowly drop over time. While this lowers the interest you receive, the more people who buy CAKE, the higher the price will go, meaning you actually might be better off.

For example, if you stake one CAKE which is worth $10 and get 100% APY you will have two CAKE or $20 worth by the end of the year. But then the interest rate drops to 80% so you’ll get $16 in interest on your $20 the following year giving you a total of just over 3 CAKE or $32 over two years.

But let’s say the price of CAKE increases at the same time the interest rate drops to 80%. You have two CAKE that used to be worth $20 total are now worth $15 each or $30 total. You’ll now be getting 80% on your $30 investment instead of 80% on $20. In this scenario you will have $54 after two years.

Of course, the price of PancakeSwap is not guaranteed to go up. There is still a huge risk that the price of PancakeSwap could plummet. 100% APY on $0 is $0.

Why we like PancakeSwap

There are many reasons to like PancakeSwap:

• No KYC – You don’t need to sign up or verify your identity
• Gas fees are cheaper because it deals with Binance Smart Chain tokens not Ethereum tokens
• You can earn passive income

Connect MetaMask to PancakeSwap

Learn how to connect a MetaMask wallet to PancakeSwap in our step-by-step guide.