PancakeSwap is a decentralized exchange that allows you to trade tokens while also offering opportunities to profit from liquidity pools and staking. What sets PancakeSwap apart from the likes of Uniswap and SushiSwap is that it runs on Binance Smart Chain (BSC) instead of Ethereum. Because of that, it is able to charge significantly lower transaction costs relative to its Ethereum-based counterparts. PancakeSwap trading fees can go as low as 0.2% per trade, which makes it a cheaper alternative for regular traders looking to save on costs. It is also cheaper to deposit assets for farming on PancakeSwap versus SushiSwap.
Trade execution on PancakeSwap is also much faster than that of Uniswap, as BSC is currently more scalable thanks to its higher throughput compared to the Ethereum network. However, it’s worth noting that these advantages of being built on BSC come at a tradeoff since it sacrifices decentralization. This presents a drawback to users or developers who prefer fully-decentralized applications. Even so, PancakeSwap has emerged as a strong DEX contender, partly due to its other income-generating features like Pancake Lottery, Pancake collectibles or NFTs, team battles, and Initial Farm Offering (IFO).
Similar to Uniswap and SushiSwap, PancakeSwap makes use of the AMM exchange model which relies on liquidity pools to facilitate trades.
In depositing funds to a liquidity pool, users or liquidity providers are compensated with the native token called CAKE.
PancakeSwap’s governance system allows CAKE holders to propose and vote on modifications to the platform.
As in most decentralized exchanges, users must first take a specified amount of CAKE to get voting rights.
CAKE tokens can also be staked in PancakeSwap’s SYRUP liquidity pools, which allows the user to earn SYRUP tokens that earn even more rewards.
The platform even offers auto-stake options that can re-stake CAKE at least once per hour, continuously compounding the rewards.
Like UniSwap, it makes use of the AMM model, which employs an algorithm to set asset prices and enables permissionless trading through liquidity pools.
Token swaps take place through PancakeSwap’s liquidity pools, enabling trades without an intermediary and allowing liquidity providers to earn a share of the transaction fees.
Each liquidity pool is a smart contract that holds reserves of two tokens and allows anyone to deposit and withdraw tokens from them based on a set of rules.
The PancakeSwap platform makes use of the Proof of Staked Authority (PoSA) as its verification mechanism, which is a hybrid between the Proof of Stake (PoS) mechanism, like that of Bitcoin, and Proof of Authority.
As such, it supports shorter block times and lower costs than the Proof of Work (PoW) consensus model, like that of Ethereum. However, it comes at a cost of sacrificing some degree of network security and decentralization.