What Is PancakeSwap (CAKE) and How Does This Decentralized Exchange Work?

What Is PancakeSwap (CAKE)?

PancakeSwap is a decentralized exchange, often shortened to DEX. Through PancakeSwap, you can swap tokens from your own crypto wallet, without a central exchange first taking custody of your tokens.

That makes PancakeSwap non-custodial. That means you keep control of your wallet yourself and approve transactions from your own wallet.

For token swaps, PancakeSwap uses an Automated Market Maker, or AMM, among other things. Instead of a traditional order book, swaps are carried out through smart contracts and liquidity pools. A liquidity pool like this contains tokens that users have made available so other users can trade with them.

The token of the PancakeSwap ecosystem is called CAKE. CAKE is the governance token of the PancakeSwap ecosystem. CAKE holders can use it to vote on certain proposals around PancakeSwap. The protocol also uses CAKE as a reward to encourage liquidity and other activity within the ecosystem.

PancakeSwap also uses a burn mechanism. A portion of the revenue from different products is used to permanently remove CAKE from circulation.

PancakeSwap started on BNB Smart Chain, but it is now available on multiple blockchain networks, including Ethereum, Arbitrum, Base, and others.

Key Takeaways

• PancakeSwap is a DEX where you can swap tokens from your own crypto wallet.
• Trading often runs through liquidity pools and an AMM, not a central order book.
• The router can combine different pools and sometimes market makers for a swap.
• Self-custody, limited liquidity, and the risks of providing liquidity are important things to keep in mind.

How Does PancakeSwap Work?

To trade on PancakeSwap, you first connect a compatible crypto wallet. Then you choose the network and the tokens you want to swap. You approve the transaction yourself from your wallet. So PancakeSwap does not first take custody of your tokens.

PancakeSwap uses a Smart Router to look for a suitable route for your swap. A swap can go directly through one liquidity pool, but it can also go through multiple pools or intermediate steps. The router can also split the transaction across different routes if that gives better execution.

To do this, PancakeSwap can use different types of liquidity, including V2, V3, and Infinity pools. On some networks and routes, other liquidity can also be used, such as StableSwap pools or integrated market makers. So a swap on PancakeSwap does not always have to go fully through one AMM pool.

Which route is ultimately used depends on things like the network, available liquidity, fees, and the price available through the different routes.

PancakeSwap (CAKE) Overview

How Does Trading on PancakeSwap Work?

For a swap, you first choose which token you want to pay with and which token you want to receive. PancakeSwap then looks for a suitable trading route. Before you approve the transaction, you can see, among other things, how many tokens you are expected to receive and which fees apply.

A swap can go directly through one liquidity pool. Sometimes the router uses multiple steps. For example, you might first swap token A for token B and then token B for token C. A swap can also be split across multiple routes.

The available liquidity affects the price of a swap. If liquidity is low, a relatively large transaction can affect the price more strongly. This is called price impact. Because of that, with a large swap you may receive fewer tokens than if you could trade the same amount in smaller transactions against a deeper market.

Liquidity Pools and Automated Market Makers

A liquidity pool is a smart contract in which tokens are available for swaps. Users who add tokens to such a pool are called liquidity providers. In return, they may receive a share of the trading fees.

How the price inside a pool is determined depends on the type of pool. PancakeSwap has different models.

In V2 pools, a traditional AMM is used where the ratio between two tokens changes when users trade. In V3 pools, liquidity providers can choose a price range in which their liquidity is active. This is called concentrated liquidity.

By making liquidity available within a smaller price range, the same capital can be used more efficiently. If the market price moves outside the chosen range, that liquidity is temporarily not active for swaps and the position does not earn trading fees until the price moves back into range.

PancakeSwap Infinity adds modular pools with hooks. Hooks are customizable pieces of smart contract code that can perform specific actions before or after a swap, adding liquidity, or initializing a pool. This lets features like dynamic trading fees, automatic limit orders, and discounts for specific token holders be built directly into the pool.

Providing liquidity also comes with risks. One of them is impermanent loss. This means the value of your position can end up lower than if you had simply kept the same tokens in your wallet. Trading fees and any CAKE incentives are also not guaranteed.

Transaction Fees on PancakeSwap

When you swap, you may deal with different kinds of fees. The pool or trading route charges a trading fee. In addition, you pay network fees to carry out the transaction on the blockchain.

On BNB Smart Chain, for example, you pay these network fees in BNB. So CAKE is not the token you normally use to pay gas fees on BNB Smart Chain.

The trading fee depends on the pool and route being used. V3 pools include fee tiers of 0.01%, 0.05%, 0.25%, and 1%.

V2 pools charge a fixed swap fee of 0.25%. Of that, 0.17% goes to liquidity providers, 0.0225% goes to the PancakeSwap Treasury, and 0.0575% goes to the CAKE buyback-and-burn mechanism.

For StableSwap, Infinity, and other pool types, the fee can be different, or it can be calculated dynamically through hooks. That is why it is important to check which route and fees are shown in the interface before a swap.

What Is CAKE Used For?

CAKE is the token of the PancakeSwap ecosystem. One important function is governance. CAKE holders can vote on certain proposals around the protocol. Since the introduction of Tokenomics 3.0, one vote equals one CAKE.

CAKE is also used as an incentive within parts of the PancakeSwap ecosystem. The protocol can issue new CAKE to encourage certain liquidity pools or other products.

PancakeSwap also uses a token burn mechanism. A portion of the revenue from different products is used to permanently remove CAKE from circulation. A share of the revenue from products like spot trading is used to buy back CAKE and permanently burn it. This removes CAKE from circulation.

PancakeSwap has also lowered CAKE's maximum supply through governance proposals, from 750 million to 450 million and later to a hard cap of 400 million CAKE.

PancakeSwap Governance

Since Tokenomics 3.0, governance works directly with CAKE. One CAKE gives one vote to the wallet that holds the token at the moment voting power is set through a snapshot. Delegating voting rights is not possible under the current model.

The old veCAKE system was discontinued in spring 2025. That also removed features like gauges voting, revenue sharing for stakers, and the fixed CAKE staking needed to get veCAKE.

For submitting proposals on Snapshot, there is a threshold of 100,000 CAKE. Community proposals and Core Team proposals each have different roles in the governance process.

So CAKE holders can influence certain decisions around PancakeSwap, but not every change to the protocol is automatically decided only by token holders.

What Is the Difference Between PancakeSwap and Other DEXs?

DEXs can work in different ways. Some mainly use liquidity pools and an Automated Market Maker. Others work with an order book or focus on specific types of trading, like perpetuals or swaps between assets with roughly the same value.

PancakeSwap is best known as an AMM-based DEX. The protocol supports different types of liquidity pools and can also use other liquidity sources for certain swaps. PancakeSwap also works on multiple blockchain networks.

PancakeSwap vs Uniswap

PancakeSwap and Uniswap are both decentralized exchanges that use smart contracts and liquidity pools for token swaps.

The main historical difference is the network they started on. PancakeSwap launched on BNB Smart Chain, while Uniswap started on Ethereum. Both protocols are now available on multiple blockchain networks.

PancakeSwap has different generations and types of pools, including V2, V3, and PancakeSwap Infinity with hooks. In addition, the Smart Router can use StableSwap pools and integrated market makers on certain routes.

Uniswap also has different protocol versions. Uniswap v3 introduced concentrated liquidity, and Uniswap v4 added similar hooks that let developers further customize pool behavior.

Both protocols also have their own token. CAKE is used, among other things, for governance and as an incentive within the PancakeSwap ecosystem. UNI is used for governance of the Uniswap Protocol.

PancakeSwap vs dYdX

The main difference between PancakeSwap and dYdX is the trading model.

For regular token swaps on PancakeSwap, you usually trade against liquidity available through pools. dYdX Chain mainly focuses on perpetuals and uses an order book and matching engine for that. In an order book, users' buy and sell orders are matched with each other.

dYdX Chain is also an independent Proof of Stake blockchain built with the Cosmos SDK and CometBFT.

CAKE is the token of the PancakeSwap ecosystem and is used, among other things, for governance. DYDX is the native token of dYdX Chain and is used for things like staking, network security, and governance.

PancakeSwap also gives users access to perpetual-related products through its interface. So the comparison above specifically refers to regular token swaps on PancakeSwap versus the order book infrastructure of dYdX Chain.

PancakeSwap vs Orca

PancakeSwap and Orca both use liquidity pools and Automated Market Makers for token swaps.

PancakeSwap started on BNB Smart Chain and is now multichain. Orca is built mainly around Solana and other networks that use the Solana Virtual Machine.

Orca uses concentrated liquidity. That lets liquidity providers decide the price range in which their liquidity is active.

PancakeSwap also supports this model in V3 pools. In addition, PancakeSwap has other pool types, including V2 and Infinity.

PancakeSwap vs Curve Finance

PancakeSwap and Curve Finance both make swaps possible through smart contracts and liquidity pools.

Curve is best known for StableSwap. This model is designed for stablecoins and other assets whose values are close to each other. The goal is to let you swap such assets with relatively little slippage.

PancakeSwap is broader and focuses on different kinds of token swaps. The protocol supports V2, V3, and Infinity pools, and it can also use StableSwap liquidity.

Curve is not only meant for stablecoins, but swaps between assets with similar value are an important part of the protocol.

How Did PancakeSwap Start?

PancakeSwap launched in September 2020 on Binance Smart Chain, the network now called BNB Smart Chain.

The project was developed by a group of anonymous developers. The individual founders have not been publicly confirmed.

PancakeSwap started as an AMM-based decentralized exchange. Over the years, new versions, pool types, and products were added, and PancakeSwap expanded to multiple blockchain networks.

In 2025, PancakeSwap Infinity was launched. Infinity introduced a new pool architecture with customizable hooks, among other things. In the same spring, CAKE Tokenomics 3.0 was also introduced. That phased out veCAKE, gauges voting, and the fixed CAKE staking.

What Are the Benefits of PancakeSwap?

• Self-custody of your crypto: You trade from your own crypto wallet. PancakeSwap does not first take custody of your tokens.

• Multiple routes for swaps: The Smart Router can use different liquidity pools and routes. On certain routes, liquidity from integrated market makers can also be used.

• Multichain: PancakeSwap is available on multiple blockchain networks. Through the interface, bridging and cross-chain swaps are also possible.

• Choice for liquidity providers: In V3, among other things, liquidity providers can decide for themselves within which price range their liquidity is active. Infinity also offers other ways to customize pools through hooks.

• Governance with CAKE: CAKE holders can vote on certain proposals around PancakeSwap. Since Tokenomics 3.0, one CAKE equals one vote.

What Are the Downsides and Risks of PancakeSwap?

• You are responsible for your own wallet: If you lose access to your wallet or recovery details, PancakeSwap cannot restore your tokens for you.

• Liquidity can be limited: With low liquidity, price impact can be larger and you may get a less favorable price.

• Impermanent loss for liquidity providers: The value of a liquidity position can end up lower than if you had only kept the same tokens in your wallet.

• Concentrated or hook-based liquidity requires management: With V3 positions, the market price can move outside the chosen price range. The position then does not earn trading fees until the price moves back into range. Hooks on Infinity pools can also add their own conditions or risks.

• Bridges add extra risks: Cross-chain swaps and bridging can use external bridge providers. They have their own smart contracts, fees, limits, and technical risks.

• Governance has limits: Community proposals are non-binding. Core Proposals are submitted by the PancakeSwap Core Team, and the team can step in without a community vote in critical situations.

• Technical risks still exist: Smart contracts, external tokens, and the blockchain networks PancakeSwap runs on can have bugs, exploits, or other technical problems.

Conclusion

PancakeSwap is a decentralized exchange that lets users swap tokens from their own crypto wallet. The protocol uses different types of liquidity pools and Automated Market Makers. The Smart Router can also use other liquidity sources for some swaps.

PancakeSwap started on BNB Smart Chain, but it is now available on multiple blockchain networks. In addition to V2 and V3 pools, the protocol has a newer generation of pools with PancakeSwap Infinity that offers more ways to customize how a pool works through hooks.

CAKE is the token of the PancakeSwap ecosystem. The token is used for governance and as an incentive within parts of the ecosystem. PancakeSwap also uses revenue from different products to buy back CAKE and permanently burn it.

PancakeSwap gives users control over their own wallet, but that also comes with more personal responsibility. Anyone who makes swaps or provides liquidity needs to keep in mind things like price impact, network fees, smart contract risks, and impermanent loss.