The secret behind great pancakes
(the official site is: https://pancakeswap.finance, always double check the URL)
I want to share some concepts about CAKE’s tokenomics and I want to see if it is sustainable in the long term.
PancakeSwap is a decentralized-application, this means that there isn’t any central governance that decides for you. So how is the platform managed? Easy, anyone who owns the “governance token” can create proposals that will then be evaluated by the other token holders in order to improve the protocol. In this way we have eliminated one of the major problems of centralized systems.
CAKE is the governance token, it gives life to the platform and realizes the dreams that we so desire. To understand the validity of a token we have to look at two main things, his tokenomics and his use cases in the ecosystem.
The tokenomics is the distribution of the token around all the ecosystem and determines its inflation/emission. Let’s take a look at the CAKE tokenomics together and break down it and try to understand how it works.
It all starts when a block of the binance smart chain is mined (every 3 seconds), at this moment 40 tokens are created. We can say that the gross emission is 420'480'000 tokens per year, a disastrous thing considering that at the time of writing the circulating supply is around 258 million tokens. To compensate, a token burn mechanism has been devised and thanks to it a percentage of the tokens created per block will never enter circulation, at the moment 25,75 CAKEs are sent to the address dedicated to the weekly burn. This number increases every month as the team proposes reduction on the emission per block, this was the last proposal.
Before doing the math, we must take into consideration that of those 14,25 CAKEs that enter the circulation about 1,597 are burned together with the other, this is because those tokens are diverted, instead of going to the platform’s lottery they are burned. The amount of new tokens created each year becomes now 133’000’000, about 51,55% of the circulating supply. We will see later how this number will lower
The question arises, where do the 12,653 CAKEs per block that are not burned end up? They are simply distributed to users who perform certain actions, in this quantity:
-10 CAKEs to those who put their CAKE in this pool named “Syrup pool”, in proportion to how many tokens have already been deposited and how many tokens you are going to deposit.
- 2,514 CAKEs to those who provide liquidity on some farm by depositing two token that have the same value in dollars; again, in proportion to how much value has already been deposited and how much value you are going to deposit.
- The remaining 0,139 CAKEs are accumulated and injected as a prize for whoever win the lottery.
Now we know how the new tokens are born, how they are burned and how they are distributed; but as we said before, the inflation in this way would be around 50%. To remedy this, the protocol’s developers have devised new use cases for the token and new burn (or deflationary) mechanisms. We could say that the use cases of a token fall within its tokenomics, in fact it is but I liked the idea of separating the two things to be more clear. As reported by the official documents these are the mechanisms that were introduced to burn additional CAKE, for now:
-0.05% of every trade made on PancakeSwap V2 is used to buy CAKE for burning
-100% of CAKE sent to the developer address
-100% of CAKE performance fees from IFOs (Initial Farm Offering, here you can buy new project’s tokens)
-100% of CAKE spent on Profile Creation and NFT minting
-100% of CAKE bid during Farm Auctions (These CAKE are offered by other projects in order to win a farm on PancakeSwap)
- 20% of CAKE spent on lottery tickets (1 ticket= 5$ paid in CAKE)
-3% of every Prediction markets round is used to buy CAKE for burning
-2% of every yield harvest in the Auto CAKE Pool
-2% of every NFT sale on the NFT Market is used to buy CAKE for burning
On Monday, these deflation mechanisms bear fruit, for example in Q4 of 2021 a total of 85’693’726 CAKEs have been burnt for an average of 6’591’825 per week; that’s $1’015’470’653, in only three months! (at the current price of $11.85) These numbers, however, also include the 25,75 CAKEs burned as soon as the block has been validated; to know how many tokens were burned in Q4 2021 by deflation mechanisms take a look at the data below.
Here is the proof of the last burn. You can see the amount of CAKE sent to the dead address.
Now we have all the data; with an average of 6’591’825 tokens burned per week, we will have a total of 342’774’900 tokens burned per year, which compared to the gross emission results in about 77’705’100 new token created every year, nearly the 30% on the current circulating supply.
In conclusion there is one thing to remember, the team is planning new developments for the project and one of the main objectives is to give more use cases to the token in order to implement new burning mechanisms and to make the token emission equal to zero or lower.
According to calculations, the neutral emission will be reached when about 1,5M of tokens will be added to the weekly burn, which is about 8,1M of tokens per week. This is to say that the data you have just read are highly variable and that they could change numerous times during the year.
I hope I was able to explain in the best possible way the tokenomics of one of the best projects out here.