Multi-Angle Analysis of Pancake: Business Returns to New Heights, What is the Project Valuation?

Author: Xu Xiaopeng

Section 1 Key Points of the Research Report

1. Core Investment Logic

PancakeSwap, as the leading DEX on BSC, has seen its core business metrics such as TVL and trading volume return to historical highs, with a noticeable improvement in profitability. Since mid-year, CAKE has undergone a token reduction of about 30%, yet its market share on BSC has continued to expand, further solidifying its leading position and leaving challengers with little opportunity. Its moat has been further validated in this process.

Additionally, the NFT market, lending business, accelerated IFOs, and increased support from Binance could all become new drivers for PancakeSwap's growth.

It is worth emphasizing that PancakeSwap occupies a core position in Binance Group's decentralized grand strategy, closely tied to the development of BSC. As the DEX version of Binance Exchange, its long-term development is worth looking forward to.

2. Valuation

From a valuation perspective, whether comparing core business data and market capitalization or looking at indicators like PE and PS, the current market capitalization of CAKE is at a low point for the year. Horizontally, the decline in Cake's valuation level is similar to that of other DeFi projects, related to the overall decline in the valuation levels of DeFi projects, thus it is not advisable to be overly optimistic about its rebound in the short to medium term.

3. Major Risks

The BSC ecosystem continues to bleed in the competition among public chains, and the crypto market is turning bearish. For details, see: [Business Analysis] --- Risk section.

Section 2 Basic Project Information

1. Project Business Scope

PancakeSwap (hereafter referred to as PCS) is an AMM mechanism trading platform on BSC, primarily engaged in trading homogeneous crypto assets, trading NFT assets, and issuing assets through IFOs. In addition to its main business, PCS also engages in lottery and price prediction betting activities.

2. Business Situation

Asset trading based on the AMM model is the main business of PCS and the current core source of value for the project, which we will focus on in this article and observe from multiple business metrics.

1. TVL: Liquidity

The liquidity level of SWAP represents the willingness of market-making funds to remain. Under the same mechanism, the more abundant the liquidity on the AMM platform, the better the overall trading experience for users, maximizing the capture of user trading behavior. Of course, through improvements in mechanisms, some swaps can offer lower slippage within a certain trading volume range, such as DODO using the PMM mechanism and Uni V3 supporting customizable liquidity market-making ranges. However, most of the top trading swaps on BSC still use the traditional AMM mechanism.

PCS's TVL trend from April to November, Source: DefiLlama

The Info data for PCS had not been updated before April, and it was not until late April that it resumed. Therefore, we only observe its TVL from April 2021 to the present. The peak of PCS's TVL occurred in early May, reaching around $7 billion. However, due to the overall crash of the crypto market and fierce competition for overall market liquidity from new public chain ecosystems, PCS's TVL did not return to its high point for a long time and remained in a state of oscillation and recovery. Entering early November, its TVL began to rise rapidly and is now close to the $7 billion TVL high of May. It is worth mentioning that during this period, its core token Cake experienced multiple rounds of reduction, but the impact on TVL was not significant.

2. Trading Volume

Trading volume is a more convincing metric than TVL, as it directly determines the protocol's cash flow income and directly affects the willingness of market makers to provide liquidity.

PCS's daily trading volume gradually returning to high levels, Source: https://pancakeswap.finance/info

Pancake's annual trading volume peak also occurred in May, but the maximum volume was seen in late May, during the crypto market crash. In addition to the trading caused by market panic, there were also a large number of collateral liquidations during this period, which should be excluded from the abnormal trading volume. Therefore, the trading volume in early May is more worthy of reference as a normal high point. Since late October, Pancake's trading volume has risen rapidly, and since November, it has increased by over 100% compared to the overall daily average trading volume in October, reaching levels similar to the peak in May, specifically in the range of $1.5 billion to $2 billion.

3. Capital Turnover Rate

The capital turnover rate reflects the efficiency of market makers' funds on the AMM platform. The higher the turnover rate, the faster the capital turnover for market makers, the higher the LP's fee yield, and the stronger the platform's attractiveness to LPs. I have calculated the LP capital turnover rate for PCS over several months, as follows:

Since June, although the heat of the crypto market has gradually warmed up, PancakeSwap's daily capital turnover rate has remained around 14%. It was not until November that its capital turnover rate saw a significant increase. This is partly related to BTC continuing to hit new highs in November, gradually increasing market trading enthusiasm. On the other hand, the recent surge in "meme" and "dog" projects on BSC, along with the explosion of GameFi and metaverse concepts, has further ignited user trading enthusiasm.

4. Active/Trading User Count

According to the monthly data disclosed by the official on November 8, the user data for PCS in October is as follows:

● Unique trading users: 4.47 million (month-on-month increase of 39.1%)

● Unique web users: 12 million (month-on-month increase of 18%)

Data Source: PancakeSwap October Recap --- Bounding into Year 2!

According to current Dappradar data rankings, PCS has 4.86 million active addresses in the last 30 days, ranking first among all dApps.

dApp's monthly active address ranking, Data Source: Dappradar

5. NFT Market Trading Data

On September 30, 2021, PCS officially launched its NFT trading business, and as of November 8, the total trading volume reached 102,208 BNB (approximately $60 million). Currently, PCS's NFT trading market is still in whitelist mode, requiring an application to be submitted and approved before items can be listed for sale.

The best-selling NFT series currently are Pancake Squad and Pancake Bunnies, both issued by PCS, with cumulative trading volumes of 72,998 and 28,606 BNB, respectively, accounting for a significant portion of the entire trading market.

Current NFT series listed on PCS

6. IFO

Recently, the issuance speed of PCS's IFOs has accelerated, with the latest one featuring DAR showing significant wealth effects. Notably, DAR had just launched as Binance's new mining launchpad before conducting its IFO on PCS. The IFO price for DAR on PCS also left enough profit margin for participants (although due to competition, the amount each person can receive is not much), which may be interpreted as Binance providing resources to PCS.

In addition to trading business and lottery, prediction markets (betting on price movements), PCS has a "lending" item on its to-do list, but it is currently of lower priority.

PCS's to-do list released in October

Considering that there are not many large lending platforms on BSC, and the largest, Venus, has bad debt issues to resolve, if PCS enters the lending market, it is expected to directly challenge Venus due to its brand advantage and large user base.

3. Team, Investors, and Partners

The team members of PCS are fully anonymous. Although the project's Medium occasionally updates interviews with various team members and news of new members joining, we do not know their actual identities and geographical distribution. According to public information, the PCS project officially launched in September 2020. Before September 2021, its project leader (codename "Chef") was Hops, and from the end of September, the project leader changed to Snowball, with Hops transitioning to an advisory role (there are more detailed rumors and statements in the market regarding this, but we will rely on public information here). After the core team personnel change was completed, Binance's resource tilt towards PCS has increased, in addition to the previously mentioned IFO project support. In conversations with some BSC projects, I also learned that BSC is very keen to see deep cooperation between ecosystem projects and PCS.

In addition to the existing team members, the project is also hiring for positions including social media marketing manager, BD manager, product lead, front-end and back-end engineers, UI/UX designers, and more.

Section 3 Business Analysis

1. Industry Space and Potential

PCS operates in the decentralized trading platform sector, where trading is the most fundamental setup in the application layer of crypto commerce. The overall scale of crypto commerce will directly determine the market space for decentralized trading platforms.

Data Source: Debank

According to Debank data, the overall daily trading volume of DEX markets is around $6.89 billion, currently at a relatively high position for the year, but still some distance from the trading peak range of $8-10 billion in April-May.

2. Project Competitive Landscape

The business scale of PCS is mainly influenced by three factors: 1. The crypto market cycle; 2. The scale of the BSC ecosystem; 3. The competitive landscape of DEXs within the BSC sector.

In the short term, the overall market is gradually recovering after the significant drop in May, with the total market capitalization of crypto assets surpassing $3 trillion, hitting new highs again. However, trading volume and other metrics still lag behind previous high ranges, indicating upward potential.

BSC's market share in TVL peaked in early May, reaching nearly 20% of the total TVL across all public chains. However, with the rise of new public chains like Solana, Terra, Avalanche, and Fantom, its total share has gradually declined to around 7.9%. Although the total TVL is still gradually climbing, it has not returned to the highs of May in terms of both share and total amount. The ecological space of BSC will be a key constraint for the future development of PCS.

Total market share of BSC TVL, Source: Defillama

However, BSC has been active in its ecosystem recently, launching an ecological incentive plan worth $1 billion, which has not yet been fully rolled out. Additionally, there are rumors that BSC is preparing for a significant performance upgrade to enhance network capacity and user experience.

CZ's recent tweet seems to confirm this rumor

In addition to rumors of performance enhancements, there have also been reports that BSC will build dedicated side chains for high-frequency applications such as gaming and derivatives. Nevertheless, Binance has not publicly announced these plans so far.

If these rumors are true, with the performance improvements of BSC, its attractiveness to developers, users, and capital will undoubtedly increase, and the BSC ecosystem will attract more gaming and derivatives applications.

Aside from the objective impacts of market cycles and the scale of the BSC ecosystem, the market share situation of PCS within the BSC ecosystem is more noteworthy.

Currently, the top five comprehensive AMM swaps by TVL on BSC include: PancakeSWAP, Mdex, Biswap, Apeswap, and Bakeryswap, with their TVL and market share changes as follows:

We find that despite the continuous emergence of new swap projects on BSC and the gradual reduction of Cake, its market share of TVL has not only not declined but has continued to expand.

This indirectly confirms the moat of PCS, which may stem from user path dependence in trading behavior (users first search for PCS when trading on BSC) and brand effect. This path dependence will inversely influence the choices of project parties regarding where to place market-making funds, leading more new projects to prioritize market-making on PCS, further reinforcing the mindset and behavior of users to "trade first on Pancake." In the recent hot trend of BSC meme coins, most new projects have chosen to place their initial liquidity on PCS.

3. Token Model Analysis

The only token of PCS is Cake, which adopts a Fair Launch distribution model, with no private placements or reserved shares for the team, and there is no upper limit on the total token supply. Currently, the net output per block is around 14.5 (after deducting the extra destruction from the lottery, the actual figure is around 12.94), with a daily net output of approximately 371,600 Cake, down 25.9% from the 501,200 daily output when I last researched Cake in “A Comprehensive Comparison of the Token Models, Cash Flows, and Moats of the Top Ten DeFi Blue Chips: Who is the King of Value Capture?”. According to CoinGecko data, the current total circulation of Cake is around 241 million (as of November 11, 2021).

Distribution of Cake

As a liquidity incentive token for the project, the distribution and destruction of Cake are quite complex. Most of the produced tokens are directly destroyed, and specific parameters and mechanisms are continually updated. Please see:

Latest version as of November 5, Source: https://docs.pancakeswap.finance/tokenomics/cake/cake-tokenomics

When we offset the output against the portion that is directly destroyed, the current distribution can be simplified as follows:

We find that the majority of the daily output of CAKE (77.5%) is actually provided to users who stake Cake alone. This means that as long as you hold Cake and stake it, up to 77.5% of the inflation from the newly issued Cake has effectively been offset by your token rewards. If we exclude this portion, the actual daily inflation of CAKE is only around 84,600, used for liquidity in farms and lottery pool incentives.

Value Capture of Cake

The value capture of Cake comes from the buyback and destruction of project income and the usage scenarios of the token, mainly including:

a. All or part of the income from the PCS protocol is used for the buyback and destruction of Cake, including:

● Full destruction of CAKE required for profile and avatar minting

● 20% destruction of Cake used for lottery purchases

● Full destruction of Cake raised from IFOs

● 3% destruction of funds used for betting in prediction markets

● 2% performance fee (fees deducted during reinvestment) from the automatic reinvestment service for single-token staking of Cake, fully destroyed

● 0.05% buyback and destruction from the trading volume on token trading platforms (with a 0.25% fee, 20% of the total fee is destroyed)

● Full destruction of CAKE used for bidding in winning projects in farm auctions

● 100% buyback and destruction of NFT trading market fees (2%)

b. Staking in syrup pools to obtain free tokens from partner projects

c. Staking Cake in syrup pools to earn new Cake output, with the current APR around 55%

d. Used for participating in proposal voting and governance

e. Used for participating in lotteries, creating personal profiles, and NFT minting, among other functions

So, how much CAKE is actually bought back and destroyed each week from PCS's various businesses? According to the latest buyback and destruction records from November 8, the total amount of CAKE bought back and destroyed from various businesses weekly is 814,000, corresponding to protocol income of $7.351 million for CAKE holders.

Latest week's CAKE destruction data, Source: PCS's Twitter

From the data alone, the weekly destruction amount of 814,000 is still far from the output amount of 2.6012 million (37.16*7), but as mentioned above, 77.5% of that 2.6012 million is allocated to CAKE stakers. This portion of CAKE, while increasing the total supply, also flows back into the pockets of CAKE holders, not creating true "inflation" for CAKE holders.

If we exclude the 77.5% issued to CAKE holders, the weekly output of CAKE is only the portion allocated for liquidity mining and lottery incentives, which amounts to 592,200, less than the destruction amount of 814,000, effectively achieving deflation.

Perhaps rephrasing this conclusion would make it easier to understand:

If starting tomorrow, CAKE cancels all output rewards for single-token staking in syrup pools while keeping the output rewards for liquidity mining and lotteries unchanged, the daily output of CAKE would change to the following state:

Since canceling the rewards for single-token staking does not affect the rewards for liquidity and lotteries, PCS's business income will not decrease and can still maintain a destruction amount of 814,000. At this point, weekly destruction > weekly inflation, and CAKE officially enters a deflationary state.

This means that if PCS wants to achieve deflation, it only needs to pause the issuance of CAKE to CAKE users to enter a deflationary state.

Some may argue that canceling the single-token staking rewards for CAKE would harm CAKE holders. However, in reality, issuing CAKE as rewards to single-token stakers does not inherently provide incremental value to holders.

This is similar to a publicly traded company that continuously issues new shares and distributes them to existing shareholders based on their ownership ratio, without changing the company's cash flow income. While the number of shares held by existing shareholders increases, the value per share is diluted due to the issuance, and the total financial value of their holdings does not change.

The above share distribution process is akin to how PCS issues CAKE to holders: the number of tokens increases, but the value per token is diluted. Quantity × intrinsic value per token = total value; as one factor increases and the other decreases, the total value remains unchanged.

Summary of Token Model Analysis

Compared to other projects, PCS's token model does not have many innovations, adopting the conventional profit buyback and destruction model. Due to its unlimited issuance model and the "self-mining" output model, its inflation scale appears exceptionally alarming. However, if we exclude the "self-mined" output portion, the current strong income of PCS has effectively placed its token into a practical "deflationary phase."

4. Risks

BSC Ecosystem Bleeding

If the BSC ecosystem continues to lose ground in competition with other public chains, leading to a shrinking market share, or if user and capital inflows slow down due to regulatory reasons, resulting in a decrease in BSC's large market share, this will lead to a ceiling on PCS's growth.

Crypto Market Cycle Turning Bearish

Although various indicators show that PCS's operating situation is rapidly improving, there remains the possibility that CAKE may not take off before the end of the bull market. Considering that the market valuations of established DeFi projects have been in a continuous downward channel in the second half of the year, CAKE's valuation recovery also requires support from an upward adjustment in the market's valuation of DeFi. While I believe that "the price of assets is a voting machine in the short term and a weighing machine in the long term" applies to the crypto market as well, if the market falls into a bear market before having a chance to reassess the project, the decline in business data caused by market recession will undoubtedly further lower PCS's market capitalization performance.

Section 4 Preliminary Value Assessment

1. Five Core Questions

What stage is the project in its operating cycle? Is it in the mature stage or the early to mid-development stage?

Although the project's business model is basically mature, in terms of the overall development stage of crypto commerce, it is still in the early to mid-development stage, with significant room for future growth. New businesses such as the NFT market and lending may become the project's second growth curve.

Does the project have a solid competitive advantage? Where does this competitive advantage come from?

PCS has a relatively solid competitive advantage on BSC. On one hand, it comes from user habits and path dependence on trading behavior with PCS, as well as the project's brand, which mutually reinforces user trading and project market-making, leading many projects to choose PCS as their primary liquidity platform. On the other hand, Binance's support for PCS in terms of resources and attitude is also an invisible core competitive advantage.

Is the project's mid to long-term investment logic clear? Is it in line with industry trends?

Trading platforms are fundamental setups in the application layer. As crypto commerce continues to thrive, its ceiling is far from being reached. The mid to long-term investment logic of PCS is very clear.

What are the main variable factors in the project's operations? Are these factors easy to quantify and measure?

The variables mainly come from the project's own competitiveness and the scale of the BSC ecosystem. We can observe the project's core metrics such as trading volume, TVL, and capital turnover speed. The BSC ecosystem can be observed through on-chain active address counts, transaction counts, and TVL metrics.

What is the project's management and governance model? What is the level of DAO?

The project has adopted a DAO governance model to initiate proposals and voting. On the governance proposal page, proposals from the community and those from the core team are distinguished by two columns. Overall, the governance work is conducted in a standard manner, and most proposals from the core team are approved.

2. Valuation Level

PCS has a clear business logic and stable protocol income. I will compare its circulating market capitalization with core metrics, as well as PE and PS indicators, to observe its current valuation level.

Market Cap/Core Metrics: MC/TVL, MC/VOL

By observing the ratio of circulating market capitalization to TVL and trading volume, we can compare this metric with the project's historical data. The lower this metric, the lower its valuation level, as shown below:

Overall, Cake's valuation level is currently at a historical low in terms of both TVL and trading volume.

PE/PS

Vertical Comparison

We can directly observe PCS's PE and PS through Token Terminal data, as follows:

CAKE's PS trend, Data Source: Token Terminal

The green range represents an abnormal spike in trading volume caused by a market crash; this will be excluded from consideration.

CAKE's PE trend, Data Source: Token Terminal

Overall, compared to itself, Cake's PS and PE are at low levels for the year.

Horizontal Comparison

Next, based on the PS metric, we compare PCS with Uniswap and Sushiswap. We can find that Cake's PS valuation is similar to Sushi, but it consistently lags behind the king on Ethereum, Uni.

CAKE's PE trend, Data Source: Token Terminal

3. Summary of Preliminary Value Assessment

As the leading DEX on BSC, PancakeSwap has seen its core business metrics such as TVL and trading volume return to historical highs, with a noticeable improvement in profitability. Since mid-year, CAKE has undergone a token reduction of about 30%, yet its market share has continued to expand, further solidifying its leading position and leaving challengers with little opportunity. Its moat has been further validated in this process.

Additionally, the NFT market, lending, accelerated IFOs, and increased support from Binance could all become new drivers for PancakeSwap's growth, drawing a second and third growth curve for it.

It is worth emphasizing that PancakeSwap occupies a core position in Binance Group's decentralized grand strategy, closely tied to the development of BSC. As the DEX version of Binance Exchange, its long-term development is worth looking forward to.

From a valuation perspective, whether comparing core business data and market capitalization or looking at indicators like PE and PS, the current market capitalization of CAKE is at a low point for the year. Horizontally, the decline in Cake's valuation level is similar to that of other DeFi projects, related to the overall decline in the valuation levels of DeFi projects, thus it is not advisable to be overly optimistic about its rebound in the short to medium term.

Section 5 References

Project Market Cap

https://www.coingecko.com/

Project Data

https://pancakeswap.finance/info

https://www.tokenterminal.com/

Industry Data

https://defillama.com/

https://debank.com/