How PancakeSwap DEX Domination Might Be Bad for BNB Chain

BNB Chain, PancakeSwap, Centralized Exchanges, Decentralized Exchanges

Today, Centralized Exchanges (CEXs) like Binance dominate cryptocurrency trading activity, although Decentralized Exchanges (DEXs) like PancakeSwap on BNB Chain are gaining popularity.

DEXs enable peer-to-peer trading by employing automated smart contracts to execute transactions without intermediaries. Not all DEXs, however, use the same underlying infrastructure.

While some people prefer traditional order book models, others prefer emergent liquidity protocols. As a result, developers are creating new aggregation methods to solve the disjointed liquidity inherent in DEXs and exchange and liquidity protocols.

PancakeSwap Is Dominating BNB Chain

PancakeSwap was built and is being maintained by a group of anonymous developers. It’s a BNB Chain-based DEX, launched near the end of 2020. It’s been speculated that PancakeSwap is a fork of ShushiSwap. However, most of these claims seem to be unfounded. It is a fork of UniSwap, but it adds in and builds upon the foundation of UniSwap’s initial offering.

According to DeFi Llama, PancakeSwap has 55% of the Total Value Locked (TVL) on BNB Chain, with $2.9 billion, followed by BiSwap in the category of DEXs with “just” $265 million.

DeFi Suffers From Too Much Centralization

Like much of the crypto market, Decentralized Finance (DeFi) is having a tough time. Not only has the subsector’s overall TVL fallen by 70% since December 2021, according to DeFiLlama, but various platforms within the not-so-decentralized DeFi space have been threatened with collapse. PancakeSwap is now the leading BNB-based AMM in terms of TVL and daily trading volume, which had crested at over $4 billion before the market crash last May.

While Celsius’s inclusion within the DeFi subsector nominally makes it a “decentralized” platform, its control over user funds demonstrates it was too centralized. Celsius’s collapse, coupled with the crash of Terra (the second-biggest DeFi platform), has raised serious questions about whether DeFi needs to become more fully decentralized, and whether it can be.

Decentralized Exchange vs. Centralized Exchange

DeFi is touted as a new form of intermediation in crypto markets. The critical elements of this ecosystem are novel automated protocols on blockchains — to support trading, lending, and investment of crypto assets — and stablecoins that facilitate fund transfers. However, there is a “decentralization illusion” in DeFi since the need for governance makes some level of centralization inevitable, and structural aspects of the system lead to a concentration of power.

In the absence of intermediaries, DEXs adopt a non-custodial structure. This means you keep ownership of your cryptocurrency and manage your wallets and private keys. Users that seek total control over their assets may consider keeping their private keys. However, there is a chance that your keys may be lost, stolen, or destroyed. If you become incapacitated or pass away unexpectedly and no one knows your password, your private keys will be lost. Because there is no intermediary, most DEXs have low counterparty risk and are not required to follow Know-Your-Customer (KYC) or Anti-Money-Laundering (AML) regulatory standards.

Suppose a DeFi platform or company wants to be “truly” decentralized. In that case, it has to operate more or less fully peer-to-peer with no single entity dominating all transactions. PancakeSwap, for instance, has dominated the DeFi sector in the BSC space.

Many people agree that if there’s centralized control of user funds, then no DeFi platform is fully decentralized, no matter what else it might operate on a distributed basis.

Apart from philosophical and theoretical concerns, the dominance of any single protocol (DEX or otherwise) could carry significant practical risks, as the failure or collapse of that dominant protocol could drag the entire chain — and all the other protocols on that chain — down with it.

What Is PancakeSwap:

PancakeSwap is a Decentralized Exchange (DEX) built on BNB Chain. It offers users various features such as Liquidity Pools, Swapping, Yield Farming, Syrup Pools, Automated Market Maker, Initial Farm Offering (IFO), NFT profile system, and many others.

In addition, the protocol helps users make the most out of their crypto assets by trading, earning through yield farming, and winning via lottery, prediction, and NFT collectibles. With the highest trading volumes in the market, PancakeSwap is the leading DEX on the BNB Chain.

Where to find PancakeSwap:

Website | Twitter | Medium | GitHub