The leading decentralized exchange
PancakeSwap is a decentralized exchange native to BNB Chain. In other words, it shares some similarities with established platforms like UniSwap in that users can swap their coins for other coins without the input of middleman services.
The only difference is that PancakeSwap focuses on BEP20 tokens – a specific token standard developed by Binance.
The BEP20 standard is essentially a checklist of functions new tokens must be able to perform in order to be compatible with the broader Binance ecosystem of dapps, wallets and other services.
For those unfamiliar with the workings of decentralized exchanges, they use a special system known as an automated market maker (AMM) so the entire process does not require order books or a single, intermediary company to facilitate trading.
In essence, there is no need for an order matching system since traders trade against liquidity pools instead of counterparties. A liquidity pool in this context refers to funds deposited by investors – which can be anyone from around the world – into smart contracts for the aim of providing liquidity to traders.
With this system, buyers do not have to wait to be matched with sellers, or vice versa. Whenever someone wants to trade one token for another, they simply deposit the token they have into the pool and withdraw the other token they wish to receive.
For instance, if you want to change a particular BEP20-based token, say ALPHA to BNB on PancakeSwap, all you need to do is find an ALPHA/BNB pool that has sufficient liquidity (meaning there’s enough tokens inside the pool to facilitate your trade).
Then, you would need to deposit your ALPHA tokens and automatically receive an amount of BNB based on the most recent exchange rate.
That said, PancakeSwap is not just for traders. You can also take up the role of a liquidity provider (that is, you can deposit tokens in a liquidity pool for the chance of earning a share of trading fees paid by those trading against the pool in question).