With the increasing popularity of decentralized exchanges (DEX), there are more and more opportunities to invest in this field. The two largest DEXs (Uniswap and Pancakeswap) may look similar, but have completely different tokens. Uniswap is more like a stable and possibly overvalued investment, while Pancakeswap is a higher risk and higher return investment.
Although the current market is very volatile, one thing will never change: trading activities on exchanges. Investors must either buy on dips or sell in panic during turbulent times, and they must trade. For privacy advocates and users who do not want to register on exchanges to buy and sell some top cryptocurrencies, decentralized exchanges provide a solution. Traders on this platform can put funds in their wallets without KYC for transactions. Due to their powerful features and improvements to centralized exchanges, many people believe that they will play a key role in the financial world in the future.
The two largest decentralized exchanges, Uniswap and Pancakeswap, have tokens, and investors can purchase these tokens to own part of the agreement. Let’s take a look at these two projects and determine which one is most likely to be the future of the decentralized exchange space.
Uniswap was released on Ethereum in 2018 and is widely regarded as one of the first decentralized exchanges based on liquidity providers. Uniswap V1 is intended as a proof of concept, and the Uniswap V2 launched in May 2020 brings higher security, more accurate prices and more optimized features. Later in 2020, the Uniswap team released the UNI token, which acts as the governance token of the network and gives holders the right to vote on protocol changes and upgrades. Investors immediately became interested in the token, and it quickly became one of the top 25 cryptocurrencies by market capitalization. Uniswap V3 was released in May 2021. It further improves efficiency and finally plans to migrate to the Ethereum expansion solution Optimistic Ethereum, which will make transaction fees almost non-existent. This is critical to Uniswap’s survival, because the current congestion in Ethereum means that Uniswap’s fees can be as high as $100 per transaction.
Pancakeswap was released on Binance Smart Chain in September 2020. The team is anonymous, and there are rumors that Binance played a role in its creation. They started out as a fork of Uniswap, which means they copied the code and created their own token. Although technically it was a copy-and-paste project, it quickly gained fame and released unique features that Uniswap didn’t have. For example, liquidity providers on Pancakeswap can not only get a share of transaction fees, but also get rewards of CAKE (the management token of the ecosystem). Another unique feature of Pancakeswap is that users can stake CAKE and obtain other tokens in exchange for over 70% of the huge amount of APY. They also provide prediction markets, lottery and IFO services, which is a new type of crowdsourcing model where users pledge CAKE and BNB in order to obtain tokens from the project. These token use cases and the faster and cheaper nature of Binance Smart Chain have resulted in Pancakeswap having gained a lot of traction since its launch.
The hype surrounding Pancakeswap is so high that its trading volume has surpassed Uniswap many times, signaling to investors that Pancakeswap may become a top DEX in the future.
At present, the market value of UNI tokens has reached 11 billion U.S. dollars, with a historical high of 22 billion U.S. dollars. The market value of CAKE tokens is 2.5 billion U.S. dollars, and the historical high is 7 billion U.S. dollars. If Pancakeswap is definitely better than Uniswap, then why is there such a big difference in valuation?
One of the most important indicators to consider when evaluating a DeFi agreement is its total value lock (TVL). This number represents the amount of funds locked in the DeFi agreement. Uniswap’s TVL is 5.3 billion U.S. dollars, and the ratio of market value to TVL is 2.2, while Pancakeswap’s TVL is 6.6 billion U.S. dollars, and the ratio of market value to TVL is 0.38.
Since the tokens of the DeFi protocol are responsible for managing the funds locked in the platform, if the ratio of TVL to market value is 1, the project can be classified as a reasonable valuation; if the ratio is greater than 1, the project is overvalued ; If the ratio is less than 1, it is underestimated.
Judging from this indicator alone, Uniswap seems to be overestimated, while Pancakeswap is greatly underestimated, but this does not fully explain the situation. UNI’s valuation is high because it has institutional support from companies such as Coinbase Ventures and Pantera Capital. It has a bright future, and the release of V3 may bring huge transaction volume to the platform, because users will eventually be able to trade at a low price. They also have a code license so that Pancakeswap cannot copy its work again. In addition, UNI has a maximum supply cap, which means that inflation will not harm the price of tokens.
On the other hand, Pancakeswap has a high inflation rate and does not have a maximum supply. Although they plan to curb inflation and create the scarcity of tokens through burning, the fear of inflation and valueless tokens scare away some investors.
Having said that, if Pancakeswap can maintain the current trading volume, it is bound to attract more attention from investors. It seems that the short-term potential of CAKE is much greater than that of UNI, and may be underestimated, while the long-term potential of UNI is even greater. Although it is easy to fall into the tribalism of the cryptocurrency world and only choose to support one platform, the best investment decision may be to invest part of each platform and cheer for both as they bring revolutionary changes to the financial industry.
Author/ Translator: Jamie Kim
Bio: Jamie Kim is a technology journalist. Raised in Hong Kong and always vocal at heart. She aims to share her expertise with the readers at blockreview.net. Kim is a Bitcoin maximalist who believes with unwavering conviction that Bitcoin is the only cryptocurrency – in fact, currency – worth caring about.