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Disclosure: Members of our team hold CAKE and other tokens mentioned in this report. This statement is intended to disclose any conflict of interest and should not be misconstrued as a recommendation to purchase any token. This content is for informational purposes only, and you should not make decisions based solely on it. This is not investment advice. 

PancakeSwap started as a Uniswap fork during the DeFi food farming craze and was most likely written off by many as just another cloned swapper on Binance Smart Chain (BSC). In February, PancakeSwap took the industry by surprise with extraordinary growth in TVL and trading volume. Today, PancakeSwap is one of the top DEXes by TVL ($4.3b) and daily trading volume ($934m).

Why such strong growth seemingly out of nowhere? We identified the following reasons:

  • New and existing crypto users who wanted to participate in DeFi but were priced out as gas fees on Ethereum soared due to heightened demand.
  • Binance enjoys a vast network effect and is the biggest crypto exchange that’s typically the first choice for retail traders. Currently, there are only two ways to onboard onto BSC. Binance Bridge (hard, daunting way for retail investors) and withdrawal from the Binance exchange (familiar UI/UX). The latter, more popular method is a powerful catalyst to onboard users to the BSC ecosystem and PancakeSwap.
  • Importantly, many strategies by vault providers like PancakeBunny and Autofarm rely heavily on CAKE emissions for yield generation. Due to the low fees and fast transactions on BSC, compounding yield is extremely efficient. To illustrate this point, the WBNB-CAKE LP pool on Autofarm compounds approximately 6,500 times a year. The compounding process of these vault strategies also contributes to trading volume on PancakeSwap.

Another growth metric to note is the total number of active unique trading addresses on PancakeSwap over the last six months.

An increasing number of EVM-compatible projects like 1inch, Alpha Homora, 0x Protocol, and SushiSwap have opted to launch on BSC, further enhancing PancakeSwap’s growth prospects moving forward. One thing to take note of is that, due to the expensive cost of launching / operating on Ethereum Mainnet, it makes sense that some smart contract developers would deploy natively on BSC as a testing ground first before graduating to the big league (i.e. Ethereum). A side effect of the lower barriers to entry (i.e. cheaper fees) is that it also makes it easier to launch scams and wash trade on BSC in general. This last point isn’t meant to discredit PancakeSwap at all, it’s just good to be aware of. 

Now that we understand the catalysts driving PancakeSwap’s phenomenal growth, let’s take a look at CAKE’s token economics. Unlike SUSHI and UNI, there is no hard cap on CAKE tokens. So far, the PancakeSwap team has committed to sticking with Chef Nomi’s “Sushi is for everyone forever” ethos. It’s important to note that the reason for keeping CAKE inflationary is to retain the ability to perpetually conduct targeted vampire attacks (e.g. SUSHI-ETH pool), in order to attract liquidity and incentivize projects to launch on PancakeSwap’s AMM. 

Initially, effective emissions are 40 CAKEs per block – that’s a lot. PancakeSwap has already reduced emissions once (from 40 to 25 CAKEs per block) and has committed to keep doing so, just not too frequently. To counteract token hyperinflation, and protect CAKE value accrual, the PancakeSwap team has introduced multiple deflationary mechanisms (Lottery, IFOs, PancakeSwap NFTs). So far, these deflationary mechanisms have burned more than 91,000,000 CAKE over the last six months.

Note that the burn rate has been hovering around 4,000,000-4,500,000 CAKE per week over the last two months.

Closing thoughts

PancakeSwap is a project with a clear roadmap, Binance’s support, and a fast-growing team. With evident retail participation in the market and cross-chain project launches on BSC, it would be unwise for onlookers to write off PancakeSwap as just another food farm. It will be interesting to see how PancakeSwap moves forward with tackling token inflation issues in the coming months.

I’ll close this report with a few potential inflation-beating vaults (smart contract risk present, this is not advice, please DYOR) that share a common single asset compounding strategy.

PancakeBunny (CAKE Maximizer) – 400% APY (at the time of writing)

Autofarm Single Cake Pool – 241% APY (at the time of writing)

ACryptoS Single Cake Pool – 294% APY (at the time of writing)

Update: There is an ongoing governance proposal that is currently favoring a 20% reduction to emissions to 22 CAKEs per block. Assuming this proposal passes and the token burn rate stays the same, this would reduce CAKE emissions by a further 1,050,000 – reducing CAKE inflation significantly, while still allowing the project to retain its vampire attack capabilities in the long-run.

Jeremy Ong Calendar
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