DeFi (Decentralized Finance) is an emerging and quickly evolving technology, offering a wide range of financial services over the blockchain. Two of the most popular DeFi protocols are Uniswap and Pancakeswap. Both of these protocols provide users with different ways to trade tokens, but what are the differences between them that explain why one might be better for certain types of trades?
In this article, we’ll take a deep dive into the two platforms and how they compare in terms of their features, fees, and risks.
What Is Uniswap?
Uniswap is an automated liquidity protocol based on Ethereum smart contracts. It enables people to directly exchange ERC-20 tokens for ETH or other ERC-20 tokens with no middleman taking a cut.
It comes with an easy-to-use interface and allows users to create their own liquidity pools, which can be used to trade between token pairs without the need of matching buyers and sellers.
Uniswap is designed primarily for automated trading, but it also supports manual trades if you want more control over your trades.
What Is Pancakeswap?
Pancakeswap is a decentralized cryptocurrency exchange built on Binance Smart Chain (BSC). It enables users to swap assets through its Automated Market Maker (AMM) model, which uses a smart contract that automatically matches buy and sell orders. The platform offers high liquidity due to the large number of users who trade on it.
Pancakeswap also supports staking and farming, allowing users to earn rewards for providing liquidity to the platform.
Comparing Uniswap and Pancakeswap
The most important distinction between Uniswap and Pancakeswap is the blockchain they are built on: Ethereum vs Binance Smart Chain (BSC). This impacts the type of tokens you can trade, as well as the fees associated with trades. Uniswap is built on Ethereum while Pancakeswap is built on the Binance Smart Chain.
When it comes to token trading, Uniswap has a much wider selection compared to Pancakeswap. Uniswap also enables you to exchange other ERC-20 tokens, such as ERC-721s (non-fungible tokens). On the other hand, Pancakeswap only supports BSC-based tokens.
It is difficult to compare already established Decentralized Exchanges (DEXs) in terms of their success or adoption rates. Uniswap, in particular, has flourished after introducing Automated Market Maker (AMM) functionalities that legitimized the world of DeFi. However, PancakeSwap’s growth rate thanks to the BSC and the CAKE token, has led many to speculate that this project might overtake Uniswap. Despite its larger user base, Uniswap’s average trading volume suggests it lacks authority when compared to PancakeSwap. While both projects offer different value propositions that appeal to different user groups and experiences, it would be interesting to see if PancakeSwap can catch up with Uniswap in terms of popularity.
In terms of fees, Uniswap charges 0.3% of every transaction you make. This is significantly lower compared to most centralized exchanges. Pancakeswap on the other hand has variable fees depending on how much liquidity is available in a given pool. Generally speaking though, Pancakeswap’s trading fees are significantly lower than Uniswap’s.
When it comes to risks, both platforms are open source and trustless meaning that funds stored in either platform cannot be stolen or tampered with. However, the risk profile of each platform differs due to the underlying blockchain technology. Ethereum is much more widely used and has a long track record of security, whereas BSC is still relatively new and its smart contracts are less audited than those on Ethereum.
1. CAKE token
PancakeSwap’s native token is used to incentivize users and rewards them for providing liquidity to the platform.
PancakeSwap released their V2 update in May 2022, which is sure to be a boon for Token Holders. This update includes a cap on the maximum total supply of CAKE at 750 million.
CAKE token holders will gain access to new benefits such as weighted voting, boosted farm yields, and enhanced IFO allocations.
The burning mechanism for CAKE remains unchanged, but users will still make the most out of its original utilities like rewards for liquidity providers and lottery rewards; in addition to using it as the governance token and utility token for lottery tickets and IFO token sales.
You can buy CAKE tokens at one of the main exchanges such as Binance, Kucoin, and SushiSwap.
2. UNI token
Uniswap’s native token is used to incentivize users and rewards them for providing liquidity to the platform. It also allows them to vote on proposed protocol upgrades and changes.
This token was airdropped on September 2020, to those who have traded cryptocurrency on Uniswap before that date. At Genesis, 1 billion UNI tokens were minted and each individual’s share was distributed in a particular portion of 60%, 21.51%, 17.80%, and 0.69% for Community, Team, Investors, and Advisors respectively.
Token holders are now part of Uniswap’s decision-making process and can vote on how the platform’s funds will be allocated or suggest changes in how it works through their ownership of the UNI tokens.
You can buy UNI tokens at major exchanges such as Coinbase, Binance, and Bitfinex.
Factors to consider while choosing a decentralized exchange
When it comes to choosing the right DEX, there are several important factors to consider including liquidity, fees, and risk. You should also pay attention to tokenomics and the native tokens associated with each platform as they might offer added benefits such as weighted voting or enhanced IFO allocations.
Your choice will depend on which platform better fits your needs and preferences.
Do your due diligence before making any investments in either project and also pay attention to their respective communities for more insights from experienced users who can provide you with a better understanding of both DEXs.
Overall, while Uniswap has an edge when it comes to the user base and liquidity, PancakeSwap is catching up quickly thanks to its V2 update and the CAKE token which has become popular among users.
Advantages of trading on decentralized exchanges
1. User autonomy: Decentralized exchanges offer users full control over their funds, meaning that they are the only ones who can access them. This contrasts with centralized exchanges where the user is at the mercy of the platform for custody and security of their assets.
2. Security: On DEXs all transactions are recorded on a public blockchain which makes it hard for hackers to tamper with records or steal funds from users’ wallets.
3. Privacy: As decentralized exchanges do not require personal information from the user, trading activities remain anonymous and untraceable to third parties such as authorities or governments.
4. Anonymity: Users can participate in trades without having to reveal their identity or provide any personal information.
5. Lower costs: Decentralized exchanges usually have lower trading fees than centralized ones, making them a more cost-effective option for those who want to trade crypto assets.
Disadvantages of trading on decentralized exchanges
1. Technical complexity: For inexperienced users, the technical process of using decentralized exchanges can be daunting and confusing.
2. Liquidity risk: As DEXs are still relatively new, they usually have low trading volumes which can lead to price slippage and make it difficult to find buyers or sellers for certain assets.
3. Lack of support: If a user encounters any problems while trading on a DEX, there is usually no customer service team to provide assistance as most decentralized exchanges operate without a central point of contact.
4. Regulatory uncertainty: Decentralized exchanges lack the necessary regulations that centralized ones often need in order to operate legally in certain jurisdictions, making them potentially high-risk investments for those who are not familiar with the regulatory landscape.
5. Vulnerability to hackers: As DEXs are built on public blockchains, they can be vulnerable to hacks if the protocols are not adequately secured. This could lead to the loss of funds for users who have stored their assets on a compromised platform.
Decentralized exchanges offer users a number of advantages such as increased autonomy, security, privacy, and anonymity. However, they also have several drawbacks that need to be considered before investing or trading in them including technical complexity, liquidity risks, lack of support, and regulatory uncertainty. It is important to do your own research and choose the DEX that best meets your needs while taking into account the associated risks.
Always remember to do your own research and assess the risks involved before committing any funds.