Uniswap vs Pancakeswap: Which DeFi DEX is the Better Investment?

With the popularity of decentralized exchanges, or DEXes, growing daily, there is lots of opportunity for investment into the space. Two of the biggest DEXes, Uniswap and Pancakeswap, may appear similar, but have quite different tokens. Uniswap is more of a stable and potentially overvalued investment, while Pancakeswap is higher risk, higher reward.

Even though the markets are incredibly volatile right now, there is one thing that will always be constant: trading activity on exchanges. In order for investors to either buy the dip or panic sell during these tumultuous times, they have to go through an exchange. For privacy advocates and users who do not want to register with an exchange to buy and sell some of the top cryptocurrencies, decentralized exchanges offer a solution. Their liquidity comes from users depositing funds in order to receive a cut of the trading fees, and traders on the platform can keep their funds in their own wallets and transact without KYC. Due to their robust nature and improvements over centralized exchanges, many believe that they will be crucial in the future of the financial world.

The two biggest decentralized exchanges, Uniswap and Pancakeswap, have tokens that investors can buy to own a piece of the protocol. Let’s look at both of these projects and determine which one is the best bet to be the future of the decentralized exchange sector.

Uniswap was released in 2018 on Ethereum and is widely considered to be one of the first liquidity provider-based decentralized exchanges. Uniswap V1 was meant as a proof of concept, and Uniswap V2, which was launched in May 2020, brought more security, more accurate prices, and greater optimization. Later in 2020, the Uniswap team released the UNI token, which acts as a governance token for the network and gives holders rights to vote on changes and upgrades to the protocol. Investors were immediately excited about this coin, and it quickly became a staple of the top 25 cryptocurrencies by market cap. Uniswap V3, which was released in May 2021, offers even more efficiency improvements and an eventual plan to move to Optimistic Ethereum, a scaling solution for Ethereum that will make fees for transactions almost nonexistent. This is incredibly crucial for the survival of Uniswap, as Ethereum’s current congestion means that fees on Uniswap can be upwards of $100 per transaction.

Pancakeswap was released in September 2020 on the Binance Smart Chain. The team is anonymous, and it is rumored that Binance had a role in its creation. They started as a fork of Uniswap, meaning they copied the code and created their own token to go along with it. Although they are technically a copy-and-pasted project, they have quickly grown to prominence and released unique features that Uniswap does not have. For example, liquidity providers on Pancakeswap not only get a cut of the trading fees, but they are also rewarded with CAKE, the governance token of the ecosystem. The CAKE rewards make LP staking incredibly lucrative, and can make the APY of liquidity providing reach above 400%. Another unique feature of Pancakeswap is that users can stake CAKE tokens and receive other tokens in return with massive APYs over 70%. They also offer a prediction market, lottery, and initial farm offerings, or IFOs, which are a new type of crowdsourcing model where users stake CAKE and BNB in order to receive tokens from a project. Naturally, these use cases for the token and the faster and cheaper nature of the Binance Smart Chain led to Pancakeswap gaining lots of traction since its release.

In fact, the hype surrounding Pancakeswap got so high that it has surpassed Uniswap in transaction volume on multiple occasions, signaling to investors that Pancakeswap may be the future top DEX.

Currently, the UNI token has a market capitalization of $11 billion, with an all-time high of $22 billion. The CAKE token has a market cap of $2.5 billion and an all-time high of $7 billion. If Pancakeswap is by all means better than Uniswap, why is there such a discrepancy in valuation?

One of the most important metrics to look at when valuing a DeFi protocol is their total value locked, or TVL. This number represents the amount of funds locked into a DeFi protocol. Uniswap has a TVL of $5.3 billion and a market cap to TVL ratio of 2.2, while Pancakeswap has a TVL of $6.6 billion and a market cap to TVL ratio of 0.38. 

Since the tokens of a DeFi protocol are in charge of governing the funds locked in the platform, a project can be classified as fairly valued with a TVL to market cap ratio of 1, overvalued if the ratio is greater than 1, and undervalued if the market cap is less than 1.

By this metric alone, it would seem that Uniswap is overvalued and Pancakeswap is significantly undervalued, but this does not tell the entire story. UNI has a higher valuation because it has institutional backing from firms like Coinbase Ventures and Pantera Capital. It also has a brighter future, and the release of V3 and their layer 2 implementation could bring massive trading volume back to the platform, as users will finally be able to transact cheaply. They also have a license on their code so that Pancakeswap cannot copy their work again. Furthermore, UNI has solid tokenomics and a capped maximum supply, meaning that inflation will not hurt the price of the token.

On the other hand, Pancakeswap has large inflation and no maximum supply. Even though they plan to curb inflation and create scarcity for the token through burning, the fear of inflation and a valueless token scares some investors away from the platform. CAKE is also not listed on a wide array of exchanges, and does not appear to have the same recognition as its rival.

That being said, if Pancakeswap is able to retain its current trading volume, it is bound to receive more attention from investors. It appears that CAKE has a lot more short-term potential than UNI and may be undervalued, while UNI has more long-term potential and fundamentally sound tokenomics. Even though it’s easy to get caught in the tribalism of the cryptocurrency community and only choose one platform to support, the best investing decision may be to allocate a portion of one’s investment to each platform, and cheer on both of them as they revolutionize the financial sector. 

By Lincoln Murr

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