How are you, my intelligent investor?, I hope all is fine. Today we will analyse CAKE crypto and Pancakeswap both fundamentally and technically to figure out, is worth investing in it or not.
Disclaimer: All the content provided in this blog post is based on my research and expertise. I am not encouraging anyone to take any investment decision.
Technical analysis of PancakeSwap
First of all, let’s have a look at the current market situation of Cake coin:
|Market Capitalization||$2.1 Billion|
|Average volume||$145 Million|
|Returns in last 1 year||-39%|
The market situation changes every moment, so you can visit Coinmarketcap to figure out the current market situation of PancakeSwap.
Currently, almost all the cryptocurrencies are low, so let’s compare them with other cryptocurrencies to do a proper technical analysis.
PankcakeSwap vs UniSwap
Uniswap is also a decentralised crypto exchange like PancakeSwap and in the last 1 year, it gave a return of -51% as compared to Cake’s -39% return.
PancakeSwap vs Kine Protocol
Kine Protocol results out to be a terrible investment as compared to PancakeSwap because it loses almost 90% of its value in the last 12 months.
Image Source- https://coin-cap.pro/en/compare/?coins=pancakeswap,kine
If we see technically then PancakeSwap has given negative returns but it is still better as compared to similar cryptocurrencies UniSwap and Kine Protocol. But we cannot decide without understanding its fundamentals. So let’s continue with it.
Fundamental analysis of Pancakeswap
Pancakeswap is a decentralised crypto exchange that was launched in 2020 which allows you to trade BEP 20 tokens at a very low fee. Don’t worry it’s just a theoretical definition and let’s discuss all the complicated terms mentioned in the definition:
What are BEP 20 tokens?
BEP 20 tokens are all the crypto tokens that are developed in the Binance smart blockchain network. It’s like a species of cryptocurrencies and those who belong to BEP 20 can be traded in PancakeSwap. Safemoon, Cake, Alpha, Bake etc are some of the most famous BEP 20 tokens.
Why only BEP 20 tokens?
A decentralised exchange works on smart contracts and since PancakeSwap is built on Binance smart blockchain (BEP 20) so it only executes smart contracts with only BEP 20 tokens.
Smart contracts are a type of agreement on a blockchain network that automatically executes if certain conditions are met. I discussed smart contracts in detail while fundamentally analysing Vechain, you can read it from there. Also, if you are finding a good crypto investment then Vechain could be the one.
What is a decentralised crypto exchange?
Before discussing the decentralised crypto exchange, you must know how a traditional centralised exchange works.
In a centralised exchange, you need to register yourself with the platform by the way of KYC which means you cannot change your name or any information, afterwards you can place your buy and sell order of a particular investment and the overall price of the investment is controlled by buyers and sellers.
The above image shows how buying and selling work in a centralised exchange.
On the other hand, in the case of a decentralised exchange, there is no need for KYC which means you can use a random name and become completely anonymous in the platform and the price of crypto is decided by Smart contracts. Also, there are no sellers and all the liquidity is provided by liquidity providers.
I know that it sounds very complex and confusing and actually, it is but I will try to make it very easier for you.
Who are Liquidity providers?
Becoming a liquidity provider is very similar to opening a savings account in a bank with some extra risks and rewards. Liquidity providers are the persons who stake their cryptocurrencies in a decentralised exchange platform in exchange for a share in the transaction fees and some extra rewards. There is no minimum time limit for staking your cryptos and you can withdraw then anytime.
The current transaction fees in PancakeSwap is 0.25% from which 0.17% is given to liquidity providers and the rest is taken by the anonymous developers and binance for managing the platform.
Like, If $1000 worth of crypto is traded in PancakeSwap then $2.5 will be the transaction fees and out of that $1.7 will be given to liquidity providers in the ratio of their liquidity.
Let’s take a detailed example to understand this concept:
Suppose you and I are the only liquidity providers in a decentralised crypto exchange. You contributed $1000 worth of CAKE tokens and $1000 worth of BAKE tokens in liquidity (total contribution $2000), and I contributed $500 worth of CAKE and $500 worth of BAKE tokens (total contribution $1000). Now if $300 is given to liquidity providers as a share of transaction fees, you will get $200 and I will get $100 which is the ratio of our total contribution in liquidity. (2:1 in this case)
I hope now the basics of a liquidity provider are clear to you. For information, anyone can become a liquidity provider and apart from rewards, a risk of impermanent loss always exists on a liquidity provider. Impermanent loss is also a complicated thing and I will not discuss it here because it is not important from an investor’s point of view. I will explain it in a future blog post.
How the crypto price is decided in PanCakeSwap?
As discussed earlier, there are no buyers in PanCakeSwap and liquidity is provided by liquidity providers and a smart contract decides the price. Now with the help of an example let’s understand how a smart contract decides the price.
Suppose there are only two cryptos tokens, Orange and Banana in a liquidity pool. The total number of orange tokens is 1,00,000 and the price of one orange token is $1, the total number of banana tokens is 40,000 and the price of one banana token is $2. Let’s represent the information in tabular form for better understanding.
Since smart contract works on the program, below mentioned instructions will be given to them:
“ Market cap of all orange tokens present on the decentralised exchange should be $1,00,000 (without any interference by liquidity providers)”. It means no matter whether the number of orange tokens increase or decrease their market cap should be $1,00,000 if there is no interference by the liquidity providers.
“ Market cap of all banana tokens present on the decentralised exchange should be $80,000 (without any interference by liquidity providers)”. It means no matter whether the number of banana tokens increase or decrease their market cap should be $80,000 if there is no interference by the liquidity providers.
“ Multiplication of price of orange token and banana token should be $2 ( $1x$2). “
Note: You exchange crypto for crypto in a decentralised exchange which means if you want to buy orange tokens, you need to give banana tokens and vice versa” You cannot buy any banana token by just giving $2 from the bank.
The smart contract will execute the above three conditions ( there are more conditions in real but these 3 are basic ones which are enough for understanding the concept). Let’s take an example to make this concept easy.
Suppose I want to exchange banana tokens for orange tokens. So I give 7,000 to the smart contract and in return, it will give me 14,897.6 orange tokens (Look at the below calculation).
After giving 7,000 banana tokens, the current situation in our decentralised exchange will be like this:
So the number of orange tokens smart contract gives to me is = 1,00,000-85106.38= 14,897.6 (approx). If you are good at mathematics then it is just a piece of cake for you but in case you don’t understand the calculation then read again from example 2 and it will be clear to you.
I can explain the calculation further but I want to make it precise for our readers that’s why I am avoiding it.
I know you have a lot of questions like “ What will help if someone adds or withdraw liquidity?. “ What will happen in the case of 3 or more cryptos?” and so on but I will not discuss it today because it will make this article longer.
In an actual world, there are millions of cryptocurrencies and thousands of liquidity providers in a well known decentralised exchange like PanCakeSwap.
Note: The concept of a decentralised exchange and liquidity providers are much wider than this. I am just clearing your basic concepts for understanding PanCakeSwap.
What is the significance of the PancakeSwap (CAKE) token?
If you remember, I earlier mentioned that Liquidity providers get some reward for providing liquidity. So, the CAKE token is that reward. A person holding a CAKE token can take part in the governance of PancakeSwap or use it to participate in lotteries, play prediction games, buy NFT’s and many more in the PancakeSwap platform. Visit PancakeSwap’s official website from your mobile and you will understand the use of cake tokens.
Should I invest in PancakeSwap?
Yes, you should invest in PancakeSwap because it has very strong fundamentals and in future, it has the potential to become an e-marketplace for buying and selling NFT’s with the help of CAKE tokens that will increase the demand for CAKE tokens which will increase its price.
Frequently Asked Questions
Is PancakeSwap limited supply?
No, PancakeSwap does not have a limited supply.
Is PancakeSwap dead?
No, Pancakeswap is not dead.
Is PancakeSwap safe?
Yes, Pancakeswap is safe.
Is Pancakeswap legit?
Yes, Pancakeswap is legit.