So you may have heard of PancakeSwap: a De-Fi protocol that many people use. But if you are a beginner it will most likely make your head spin. I have made my first steps into the De-Fi world a couple of weeks ago and hope to break it down for those also starting. I will make a post later on how to actually go through the steps of doing this all, but for now I just want to explain what it is in understandable terms.
What is PancakeSwap?
To keep it as simple as possible: PancakeSwap is a platform where people can swap tokens, people can provide liquidity for that swap and where you can stake tokens to earn more tokens. It works on the Binance Smart Chain (BSC) and the big advantage of that it that it doesn't have the high gas prices of the Ethereum network, making it a lot more accessible for normal people like you and I that don't have a heap of crypto. The reward often comes in Cake, the token of the platform.
Liquidity pools
One of the ways to make money on PancakeSwap is to provide liquidity to the platform, this is always done in pairs of coins and they always have a 50/50 ratio in the pool. If you put two coins in a liquidity pool you will receive LP tokens for them. So say you put in BNB and Cake you get BNB/Cake LP tokens. By putting coins in the liquidity pool you are making it possible for other people to swap tokens, so you provide the platform with a service.
Farms
These LP tokens you can then put in farms and they will start to earn you Cake tokens over time. The more LP tokens, the higher the gains and you will see that some farms have a higher reward than others. The common rule is: the more stable a coin pair is and thus the less risk you take means that the reward will be lower. High rewards therefore mean that you are also taking more risks.
Pools
To top it all off you can put your earned cake into pools and earn even more cake (or other tokens, there are quite some options there). This means you can earn more with your earned cake. If you want to avoid the risks of the liquidity pool you can also buy cake and only put that in a pool and take the rewards from that.
What are the risks?
So I would encourage you of course to really have a good look at what you're getting into before you get started, but some things you certainly need to be aware of:
Impermanent Loss. You may have heard of this term. In simple words you can lose money by providing coins in a liquidity pool. Since the distribution of coins in an LP is always 50/50 that means if the price of 1 shoots up or drops down compared to the other you may encounter impermanent loss. That means that if you wish to withdraw your tokens after a big drop or push you will not get back what you put in. If you encounter impermanent loss it means that you would have made more money if you had just kept the coins as assets and not in a liquidity pool. You can read more about it here.
Getting seduced by promises of high rewards. Some farms promise a really high yield and you may think yay money! But, the reason those rewards are high is because the risk is high. That means there is a great chance a coin will be volatile (go up or down a lot) and you may lose your money. Always always always research the coins, check if they are not scams and see if it is a wise investment. Remember it is better to make less money then to loose your money.
I hope this has made PancakeSwap a bit more understandable for those of you just starting out with crypto or with De-Fi. In a follow-up post soon I will go through how to actually do all these things.
Feel free to ask anything or give feedback. And remember I am not giving you financial advice, always do your own research!