Building Passive Income with PancakeSwap: A Beginner's Guide
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Recently, I stumbled upon a straightforward method to generate passive income through a platform called PancakeSwap. Over the past week, I invested $500 and have been quite impressed. It's essential to emphasize that this is passive income, meaning minimal effort is required to earn money.
It's important to clarify that this is not a quick-rich scheme. As of this writing, the projected Annual Percentage Yield (APY) stands at 67.55%.
A 67.55% yield is indeed attractive. As depicted in the image, my $51 (4.35 CAKE) investment is projected to return $34.96 (2.945 CAKE) over a year of staking. This calculation only considers the CAKE tokens earned and does not factor in any price fluctuations.
Currently, I have $50 staked in a feature called AutoCake and $450 in a Farm. I'll explain both methods and their respective advantages and disadvantages shortly.
By investing (staking) in the CAKE cryptocurrency, you can automatically accumulate additional CAKE, which you can later sell for profit.
> Only invest what you can afford to lose.
This article does not serve as financial advice; please invest responsibly and conduct your own research.
How It Works — Proof of Stake
Proof of Stake is a consensus mechanism for blockchain technology that enables users to mine cryptocurrencies by staking their coins in exchange for rewards that support the network. Its popularity has surged in recent years.
The principle is straightforward: you provide liquidity (stake) to a coin and receive rewards in return. PancakeSwap operates with its token, CAKE, on the Binance Smart Chain (BSC), which boasts significantly lower transaction fees compared to Ethereum, for example.
BNB is the primary currency on BSC, utilized for transaction execution. You can exchange BNB for CAKE and vice versa.
PancakeSwap allows you to stake CAKE to earn additional CAKE, establishing the foundation for passive income. There are two methods to begin earning CAKE: Farms and Pools.
Farms involve providing liquidity for two tokens. When farming, you need to select two cryptocurrencies you own and stake them as a pair. The token pair you stake is converted into a Liquidity Provider token. For instance, if I choose to farm BNB and CAKE, I need to supply both to obtain BNB-CAKE LP tokens.
As of this writing, the farming yield is 41.53% APR. Additionally, farmers receive 0.17% of trading fees, meaning the more trading occurs, the higher the earnings.
A significant advantage of farming is that you retain your original tokens; in my case, I can always recover my BNB and CAKE. This aspect helps mitigate risk, as if the price of CAKE drops, you still have your BNB as a safety net.
It's advisable to look for cryptocurrency pairs that maintain stable prices relative to one another, such as CAKE and BNB, to avoid the risks associated with Impermanent Loss, which will be discussed in the Risks section.
The second method is Syrup Pools, which are more straightforward and only require one token, making them ideal for beginners. For example, I have staked CAKE and am automatically earning CAKE at a rate of 69% annually.
If I stake 100 CAKE, I will earn 69 CAKE after a year. There are also auto pools that automatically reinvest any earned CAKE back into the pool, enhancing your total income.
The advantage of Syrup Pools is the absence of impermanent loss concerns, making them simpler to comprehend. However, if the price of CAKE drops, you may be more significantly affected since you need to convert your BNB into CAKE.
Don’t fret if this seems complicated; it’s relatively easy. We’ll break it down step-by-step later in this article.
Risks
When staking tokens in a Pool, you will always retain them; however, their value may decrease, which is a constant risk in the crypto market.
The risk with staking is that if the value of CAKE declines, you may end up with many tokens worth less. Conversely, a significant price increase could lead to substantial profits.
Farming often results in better rewards but comes with the added risk of Impermanent Loss. This loss occurs when the value of one of the tokens in the pair fluctuates. For a comprehensive understanding of Impermanent Loss, refer to the explanation available on Binance.
Farms typically offer rewards such as trading fees, which are distributed among liquidity providers (farmers) to offset the risks associated with Impermanent Loss.
How to Start — Download a Wallet & Add Binance Smart Chain
Firstly, you need a wallet for your cryptocurrency. I personally prefer Metamask, although TrustWallet is also a popular choice.
Download the wallet app on mobile or the Chrome extension for Metamask. After installation, you can find the MetaMask icon at the top of your browser.
Next, you must add the Binance Smart Chain to your wallet, as this is the blockchain network utilized by PancakeSwap.
Open Metamask, go to the Settings, and locate the Networks tab.
Under the networks option, select Add Network. You will encounter several fields to fill; don’t worry if they seem confusing—just copy the values below:
Network Name: Smart Chain
New RPC URL: https://bsc-dataseed.binance.org/
ChainID: 56
Symbol: BNB
Block Explorer URL: https://bscscan.com
For a comprehensive guide on adding BSC to Metamask, please visit the Binance website.
Second Step — Buying BNB
The next step is to purchase some BNB and transfer it to your wallet. I recommend acquiring BNB directly through the official Binance website.
BNB is the cryptocurrency used on the Binance Smart Chain, the blockchain on which PancakeSwap operates. Therefore, all transactions and fees will require BNB.
I have a referral link for Binance, which provides me with a 15% commission on all trades made by referred accounts, and they receive a 5% commission as well!
It’s a win-win situation!
Make sure to use the referral link if you are new to Binance.
Navigate to the Buy Crypto menu and select BNB for purchase.
Ensure you specifically choose to buy BNB, as other cryptocurrencies cannot be utilized on the Binance Smart Chain.
After acquiring BNB on Binance, transfer it to your Metamask or TrustWallet account.
To access your Binance wallet, click the profile button on the top bar and navigate to Wallet ? Fiat and Spot.
Locate your BNB wallet and click Withdraw.
It is crucial to select the correct Network during the withdrawal. PancakeSwap and Binance operate on the BSC network, so ensure that you choose this option.
The address should match the one provided by Metamask or TrustWallet. You can copy it by clicking on the Account option at the top of the Metamask extension.
Third Step — Visit PancakeSwap & Buy CAKE with Your BNB
Now it’s time to visit PancakeSwap. Ensure you access the correct site and bookmark it, as there are fraudulent websites attempting to scam users.
The simplest approach is to access PancakeSwap directly through the TrustWallet App. Open the app and navigate to the DApps tab, where you should find a clickable link to PancakeSwap.
Alternatively, if you are using Metamask, go to the Browser tab and visit https://pancakeswap.finance/.
Once you are on PancakeSwap, you need to connect your wallet to start trading.
If you accessed PancakeSwap through the Metamask or TrustWallet browser, simply click Connect Wallet at the top.
Choose your desired wallet from the list.
Now that you are connected, decide whether you want to Farm or Stake. If you're uncertain, you can find more information on the PancakeSwap tutorial site. In my view, beginners should start with Pools (Staking) until they fully grasp how everything operates.
If you plan to farm, convert 50% of your BNB to CAKE.
For staking in a pool, convert 95% of your BNB to CAKE, leaving a little BNB for future transactions.
To swap, head to the Trade tab in PancakeSwap and select Exchange. Here, you will exchange your BNB for CAKE, which is required for both Staking and Farming.
Ensure the value in USD for both tokens remains the same if you plan to Farm.
Once you confirm the exchange, your CAKE will be deposited into your wallet.
Next, navigate to the Earn tab, where you will find the two methods for starting your passive income.
Choose either the Farm or Pool based on your preference.
Fourth Step — Staking in Pools
When staking, there are various pools, each providing different rewards. Staking in the CAKE pool rewards you with CAKE, but there are pools for other tokens too.
Always research the tokens you invest in; some may yield substantial rewards if their prices increase, while others may carry significant risks.
Identify the pool you prefer; I recommend the AutoCake pool, which automatically reinvests any CAKE you earn, allowing your earnings to generate even more.
A notable advantage of AutoCake is that there are no transaction fees, although PancakeSwap takes 2% from the earnings made in AutoCake.
If you invest heavily and earn more than the transaction fees, then Manual Cake may be more favorable.
Once you stake, there is a penalty for withdrawing your CAKE before three days. After this period, you can withdraw without penalty, and there is no time limit on how long you must stake.
Fifth Step — Farming
If you choose to Farm, you will need to convert your BNB and CAKE into CAKE-BNB LP tokens within the Liquidity menu. This step can be bypassed if you prefer a straightforward stake in a Pool.
Click on Add Liquidity to proceed to the next menu, where you can select the token pair for farming.
As seen in the image, I have selected CAKE and BNB, and the platform assists with the amount correlation for a 50% distribution between the pair.
You will see all available farms named by the token pair required for farming, such as BNB-CAKE.
To commence farming with your LP tokens, click the Enable button in the BNB-CAKE pool and authorize it to access your wallet. Then, use the + button to set the amount of LP tokens you wish to farm with.
To halt farming, simply click the - button and specify the amount you want to withdraw. This action will return the CAKE-BNB LP tokens to your wallet, enabling you to trade back to BNB and CAKE.
Fifth Step — Harvesting Rewards
Once your farming or staking efforts have yielded sufficient CAKE, you can Harvest (claim). This means the CAKE earned will be credited to your wallet. Ensure you only harvest if your accrued CAKE surpasses the transaction cost.
The CAKE you earn can be exchanged for BNB if you wish to convert it into regular fiat currency on Binance. PancakeSwap does not facilitate trading with fiat directly, so you will need to swap CAKE for BNB, deposit that BNB into Binance or other trading platforms, and sell it.
You can also utilize your CAKE in various ways; I typically reinvest my farm yields into AutoCake.
Additionally, you might consider participating in the lottery for a chance to win big, although this carries its own risks.
Conclusion
As previously mentioned, this is not a get-rich-quick scheme.
When I initially invested in CAKE, the price was $10 per token. I earned 2 CAKE through farming and staking, translating into a quick profit of $20. However, the real profit potential lies in holding the earned CAKE, reinvesting, and staking it for further gains.
With patience, I can wait for market movements; for instance, CAKE once surged to $40 per token, which could elevate my $20 to $80 if such a scenario occurs again.
PancakeSwap presents a beginner-friendly entry into cryptocurrency, enabling you to earn rewards with relative ease. I appreciate that I can acquire new, potentially volatile cryptocurrencies by staking my CAKE in various pools, thus diversifying my portfolio without significant risk.
While the risk exists that a token may fail, my primary loss would be the time invested in staking.
I believe in the future of decentralized finance (DeFi) applications, and I want to be part of it.
Engaging with cryptocurrency can be an enjoyable experience, providing the opportunity for passive income that grows over time.
So, what are you waiting for?
Dive in and start earning with CAKE, but remember to invest only what you can afford to lose!
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