Written by: CMC Research

Compiled by: Deep Tide TechFlow

In 2023, the decentralized exchange market has shown a healthy consolidation trend around several market leaders. Uniswap (UNI) still leads in total value locked (TVL) and trading volume among other exchanges. However, PancakeSwap (CAKE) is a well-known name that has maintained its position as one of the top competitors. The overall DEX industry's trading volume has decreased compared to 2022.

Facing the sideways market, PancakeSwap increased its total trading volume by 77% from the first quarter to the second quarter of 2023. Since the release of the V3 version, it has doubled its market share in decentralized exchanges. Expanding to Ethereum and layer-two solutions, the new CAKE token economic model and other product releases have helped PancakeSwap stay at the forefront of DEX innovation.

What is PancakeSwap?

PancakeSwap was originally built on the BNB chain, allowing users to trade tokens without using centralized exchanges. It offers a range of products such as:

• Token exchange

• Earning rewards through liquidity mining

• Staking CAKE tokens in Syrup Pools

• Ethereum liquidity staking (wBETH) and simple staking

• Pancake Protectors game

• v3 Position Manager (new feature)

• A prediction market

• IFO token launches

• Connecting CAKE with Ethereum and Aptos cross-chain bridge

• Lottery system

• NFT market

PancakeSwap innovates rapidly and regularly releases new products. In April 2023, PancakeSwap voted to transition to a deflationary token model called "Ultrasound CAKE." The protocol passed a proposal called CAKE Tokenomics v2.5 to create a structure that combines real yields (no supply impact) and reduces token issuance. Over 102% of CAKE is burned weekly. This is intended to provide space for issuance for years and incentivize locking CAKE, making the token more valuable in the long run.

PancakeSwap has an anonymous team of "chefs" working in the "kitchen" of PancakeSwap. The platform is open-source and has been audited by several well-known blockchain security companies such as Peckshield and Slowmist.

Despite the bear market affecting the protocol's TVL and trading volume, PancakeSwap still has an annualized revenue of $27 million, with 42% of CAKE being staked:  ### What is PancakeSwap V3? PancakeSwap V3 introduces several key innovations and features to improve capital efficiency, reduce trader fees, increase liquidity provider earnings, and enhance overall user experience. PancakeSwap V3 allows for concentrated liquidity, enabling liquidity providers to concentrate their capital in specific price ranges rather than evenly distributing it across the entire price range. This concentration of capital in the most active ranges can provide up to 4000x capital efficiency, especially for stablecoin pools, compared to V2. Therefore, liquidity providers can earn more fees on the same amount of liquidity. Traders can also benefit from lower trading fees in V3, as there are now 4 fee tiers: 0.01%, 0.05%, 0.25%, and 1%, compared to the fixed 0.25% fee in V2. These tiers cater to different trading pairs' expected volatility and trading activity. Concentrating liquidity in active ranges can also reduce slippage for traders. V3 also implements an intelligent router to find the best trading route between V3, V2, and StableSwap pools. For liquidity providers, choosing fee tiers, customizing price ranges, creating non-fungible liquidity positions, and concentrating capital provide more flexibility and potential for maximizing earnings. V3 also introduces active liquidity mining, rewarding users with CAKE tokens when the price falls within their active liquidity position's price range. One of the latest and most innovative features added to PancakeSwap is the position manager. It introduces automatic compounding of rewards, so all fees and rewards earned by liquidity positions are automatically compounded back into the pool. Over time, LP positions grow exponentially through the power of compounding. Additionally, the position manager automatically handles gas fees and position rebalancing, reducing the risk of impermanent loss. LPs can provide liquidity in concentrated price ranges to maximize fees from high trading volumes and choose strategies optimized for their risk tolerance. ### Ultrasound CAKE Tokenomics  In October 2023, PancakeSwap burned over 1.76 million CAKE tokens and only minted 1.42 million new tokens. This resulted in a net decrease of 337,000 CAKE tokens, reducing the total supply by 0.086%. PancakeSwap has been committed to transforming CAKE into a deflationary token through strategic burns. The exchange has implemented several changes to drive organic trading volume and activity: - Reduced the issuance of CAKE per block from the initial 40 to the current approximately 1.8374, achieved by allocating fewer CAKE rewards to the pools over time. - Projected a reduction of 750 million in the maximum supply limit for CAKE. With the current circulating supply at approximately 388 million and being deflationary, CAKE may never reach the maximum limit.- Implemented burn mechanisms across various products: - 0.001-0.23% of each transaction in V3 - 0.0575% of each transaction in V2 - 0.004-0.016% of each transaction in StableSwap - 100% of CAKE sent to developer address - 100% of CAKE performance fees for IFOs - 100% of CAKE for creating profiles and minting NFTs - 100% of CAKE from winning bids in Farm auctions - 20% of CAKE for purchasing lottery tickets - 20% of all profits from perpetual trading - 8% of weekly allocation from the Pottery bonus pool - 3% from each round of BNB prediction markets used to buy and burn CAKE - 3% from each round of CAKE prediction markets - 2% of each harvest from CAKE pools in flexible staking positions - 2% from each NFT sale in the NFT market used to buy and burn CAKE.  To align the incentive mechanism with loyalty, PancakeSwap also introduced a revenue-sharing program. A portion of trading fees is allocated weekly to CAKE stakers based on the amount and duration of CAKE they have staked. Staked CAKE distributes shares (also known as rCAKE) to users, recalculated based on: - The amount of locked CAKE - The remaining lock duration of the locked CAKE, rounded down to weeks, and the maximum allowed lock time (52 weeks). For example, staking 50 CAKE for 10 weeks, with a maximum of 52 weeks, would generate approximately 9.61 virtual shares (rCAKE) in the revenue-sharing pool. This provides CAKE stakers with their real earnings. The longer the lock time, the higher the proportion of trading fee income. This locking mechanism for CAKE is reminiscent of how protocols like Curve Wars and Convex Finance reward locked CRV tokens. There are some similarities between the two: - Both CAKE and CRV are governance tokens that accrue voting power when locked for a period. The longer the lock time, the more voting power.

Locking both tokens provides additional rewards and benefits to holders. For CAKE, benefits include fee rebates and increased Farm yields. For CRV, benefits include increased CRV rewards.

Locking creates scarcity for both tokens and aligns incentives between the protocol and long-term oriented users.

However, there are some key differences where PancakeSwap has an advantage over Curve:

• CAKE revenue sharing rewards loyal lockers with a portion of platform fees based on lock duration. CRV does not have a similar revenue-sharing model.

• Locked CAKE increases their initial Farm allocation and Farm yields for IFOs. Locked CRV does not provide these specific benefits, only additional CRV rewards.

• CRV is crucial for Curve's liquidity pools and voting. CAKE is not a prerequisite for providing liquidity on PancakeSwap.

• PancakeSwap's reduced supply has put CAKE on a deflationary path. CRV's supply is still inflationary. While both aim to incentivize locking governance tokens, CAKE locking provides more benefits such as revenue sharing. With its focus on rewarding the community and long-term development, PancakeSwap seems well-positioned to capture a significant share of the growth on Ethereum L2 chains.

PancakeSwap's Multi-Chain Expansion

PancakeSwap has been pursuing a multi-chain strategy, enabling the decentralized exchange and CAKE token to launch on different layer-one and layer-two blockchains.

Since the launch of version 3 in early Q2 (April 2023), PancakeSwap has seen an increase in monthly trading volume and market share in DEX trading. Total trading volume in Q2 increased by 77% compared to Q1, and Q3 volume grew by 11.2% compared to Q2.

Meanwhile, market share in DEX trading increased by 110% from Q1 to Q2, and by 92% from Q1 to Q3.

PancakeSwap Monthly Trading Volume

DEX Trading Volume Market Share

The exchange launched on Ethereum in September 2022 and on Aptos in October 2022. Since then, several Ethereum L2s have been added, such as Base, opBNB, Arbitrum, Linea, zkSync Era, and Polygon zkEVM.

PancakeSwap on Ethereum

PancakeSwap launched on Ethereum in September 2022 and has seen steady growth in trading volume over the past 12 months:

In terms of total value locked (TVL), PancakeSwap lags behind Uniswap and Sushiswap. However, its ratio of trading volume to TVL is comparable to Uniswap, indicating a sustainable growth pattern and potential for higher capital efficiency:

PancakeSwap on zkSync ERA

zkSync ERA is one of Ethereum's major zk-centric layer-two solutions. PancakeSwap has become one of the primary decentralized exchanges in this ecosystem. It ranks second in trading volume and fifth in total value locked:

Furthermore, since its launch in July 2023, both of these metrics have shown explosive growth:

PancakeSwap on Base

PancakeSwap launched on Base in August 2023 and quickly became one of the leading decentralized exchanges in this ecosystem, with relatively lower TVL compared to Uniswap and Aerodrome in terms of trading volume.

The total value locked on Base has been steadily increasing over the past two months, currently hovering around $2 million:

PancakeSwap on Linea

PancakeSwap is the largest DEX in terms of trading volume on Linea, which is an EVM-compatible L1 using zk-rollups as a scaling solution:

PancakeSwap on Polygon zkEVM

PancakeSwap has quickly become one of the top DEXs on Polygon zkEVM. Polygon zkEVM is a nascent ecosystem with lower trading volume and TVL compared to others. However, it utilizes zk-rollups as a scaling technology, which is one of the primary scaling solutions for the next generation of blockchains:

PancakeSwap on Arbitrum

PancakeSwap launched on Arbitrum in August 2023 and ranks in the top 20 in terms of total value locked and trading volume. Due to entrenched competition on Arbitrum, PancakeSwap's growth has not been as explosive as on Base, but has maintained a steady growth trajectory:

PancakeSwap on opBNB

opBNB is a layer-two chain built on the Optimism stack, extending Binance's BNB chain. So far, PancakeSwap is the only decentralized exchange on opBNB, allowing it to capture 100% of the growth in this rapidly expanding ecosystem:

New Products from PancakeSwap

PancakeSwap offers a rich suite of products for trading users:

In addition to the core exchange and farms, PancakeSwap also launched some brand new products and services in 2023. The launch of Pancake Protectors marks PancakeSwap's first foray into the blockchain gaming space. This PvP game provides an engaging experience along with NFT rewards.

PancakeSwap has also added fiat onramps through partners such as Moonpay, Mercuryo, and Transak. Users can now directly purchase cryptocurrencies using credit cards, bank transfers, and other fiat payment methods.

Other new products include liquidity staking through Synclub and the revival of previously paused Farm auctions. PancakeSwap has also introduced a profit-sharing program to reward loyal CAKE stakers. Additionally, PancakeSwap's iconic liquidity mining is continuously expanding, adding over 200 new Farms across multiple chains in 2023. Products like bCAKE v3 help users maximize their earnings.

Finally, PancakeSwap has enhanced the trading experience by integrating features that improve execution efficiency and reduce costs. In addition to launching PancakeSwap v3, perpetual trading has undergone significant v2 updates, introducing new features such as Degen Mode. Integration of market makers and leveraging Celer Network's bridging capabilities enable zero-slippage trading for non-BNB chain pairs. The adoption of Bloxroute's secure solution, Private RPC, aims to protect users from bots and front-running.

Roadmap and Future Outlook

PancakeSwap has an ambitious roadmap aimed at enhancing user experience through innovation across various aspects of its platform.

In the fourth quarter of 2023, PancakeSwap introduced a position manager, automating liquidity provisioning. Users simply deposit assets, and they are automatically deployed into pools and Farms for yield optimization. This eliminates the complex calculations and gas fees required for manual management. PancakeSwap also plans to launch veCAKE, allowing CAKE holders to vote on governance proposals based on their veCAKE balance, increasing community engagement. A voting dashboard will be added to allow the community to direct CAKE issuance and rewards to preferred protocols, similar to the CRV model.

Furthermore, PancakeSwap will bring all its DEX products, such as trading, liquidity mining, and lotteries, to all supported chains. This also includes the introduction of multi-chain games.

Other planned significant updates include:

• Integration of notification system: This will enable important alerts and updates to be directly pushed to users through the PancakeSwap interface and connected wallets.

• Increasing yield through multi-chain expansion: PancakeSwap is considering increasing more yield through expansion and attracting users from other chains to increase CAKE burning.

• Reducing maximum supply: PancakeSwap plans to reduce the maximum supply of CAKE from the current 750 million by the end of this year. The projected timeline is by the end of 2023.

• Resuming trading competitions: PancakeSwap may resume trading competitions in the future based on market conditions to increase user engagement. However, the current trading rewards are more flexible.

• Integration with asset-backed partners: PancakeSwap is exploring partnerships with protocols backed by real-world assets to attract institutional capital.

• GameFi expansion: PancakeSwap is exploring a gaming platform where third-party developers can develop and release their multi-chain games on PancakeSwap.

In the long run, PancakeSwap aims to become a seamless, user-friendly, decentralized one-stop DeFi platform accessible across multiple blockchains. The exchange continues to build and launch innovative products while optimizing its token economic model.

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