Good afternoon PancakeSwap community and CAKE holders!🐰
We’ve noticed that many of you had questions and points of feedback from our Discussion Proposal for CAKE tokenomics v2.5 🗳️
If you haven't yet read the proposal, you can find it here 👉 https://bit.ly/3Ac4Vpb
We want to share with you the answers to many of the questions you have been asking.
Please, if you have any other questions regarding the voting, feel free to ask our chefs in our communities and official channels.
❓CAKE Tokenomics v2.5 FAQs❓
Q: How will revenue sharing work in Tokenomics v2.5?
A: Revenue generated from v3 will be shared with stakers, and longer-term stakers will receive a bigger share of the revenue. The technical details of implementation are still being worked out, but it will follow the logic of the current CAKE staking, where longer-term stakers are favored over shorter-term stakers to align the benefits of loyal stakers with the growth of PancakeSwap.
Q: How will the revenue be distributed to stakers?
A: Users who are fixed-term staking their CAKE will be able to participate in the new revenue sharing program. Same with locked staking, the distribution will be biased towards longer term staking users. Earned revenues will be able to harvest on a monthly basis.
Q: Why is the revenue share set at 5%?
A: The 5% revenue share is based on various wider considerations. The Chefs currently believe that it will not affect the competitiveness of the 0.01% and 0.05% trading pools based on v3's early successful launch, and the revenue share will be sustainable. The allocation of trading fees has been carefully considered to ensure that LPs are still provided with the right amount of fees and CAKE rewards, so that the platform can be sustainable over the long term against competitor DEXs on different chains.
Q: Is protocol revenue sharing going to be able to make up the reduction in staking APR?
A: It is not expected to in the short term. First, please see our documentation on the trading fees and breakdown of v3 and how trading fees are distributed to various parties. For a quick estimate, for second week of v3’s launch, v3 traded approximately $800m of volume in a week (link). As most trading occurs in the 0.01% and 0.05% fee tier, we can assume the average fee paid on this volume is 0.025%. On an annualized basis, a 5% revenue sharing of this fee should amount to under 1% APR.
For PancakeSwap and other DEXs, most of the AMM trading fees go to liquidity providers, who risk their capital to enable trading on PancakeSwap. A large part of the remaining funds goes to CAKE buyback and burn mechanism to reduce CAKE supply.
Growth in protocol revenue from AMM trading is largely expected to come from PancakeSwap successfully expanding to more chains. PancakeSwap is currently the leading DEX on BNB Chain, and is actively building on Ethereum and other chains to come.
Q. Will using 5% of the distribution from the treasury have any long-term impact on the dev fund?
A: We don't think so. We had earmarked this portion for LPs in case the LP distribution needed to be higher and liquidity providers were not coming to v3. Our primary aim with v3 is always to ensure that we support the TVL, pushing our trading volume and CAKE burn to new heights. As you have seen with the recent Farm emissions reduction and now this Syrup Pool reduction, we are erring on the side of not having to increase CAKE APRs (i.e. inflation) on Farms to attract liquidity providers.
Q: What is the relationship between the CAKE Syrup Pool APR, and overall inflation rate?
A: The CAKE Syrup Pool currently receives the largest allocation of CAKE emissions. Following the reduction on Farm Emissions, CAKE Syrup Pool currently receives ~70% of all CAKE emissions. Therefore, there is a strong relationship between CAKE’s overall inflation rate and the Syrup Pool emission rate. Below is a table that shows the relationship between CAKE/block emissions on the CAKE Syrup Pool, APR, and overall inflation rate.
CAKE inflation rates are dynamic on many factors since there are many sources of CAKE emissions and CAKE burn, therefore figures are very approximate.
Q: Will CAKE staking still be attractive after Syrup Pool reductions are introduced?
A: First, the CAKE token is one of the most utility-rich tokens in crypto. See a brief summary here. Second, below is a sampling of staking APRs (if available) on other leading DEXs on other chains, listed in order by Coingecko volumes.
Data: Current as of 25rd April, 2023.
Q: If CAKE Syrup Pool APR is comparable with L1 staking interest rates, would that make CAKE staking uncompetitive?
A: DEX and DeFi protocols have different token models from L1s. L1s do not provide trading or DeFi services, do not need/want to incentivize liquidity for execution of trades and therefore their tokenomics model is not based on the same logic.
We cannot speak to all the details which drive L1 staking APR, however the comparison between CAKE staking and L1 staking is not apples-to-apples.
Q: What are the product benefits that will accrue to staked CAKE and how will longer stakers benefit on the product utility?
A: On a high level, many products on PancakeSwap attract some level of fees which are mostly going to CAKE burn.
As a general principle, Staked CAKE can therefore be used to differentiate either fee levels or be used to boost returns, depending on the product. For example, with the upcoming Simple Staking integration, we are working on reducing fees for CAKE Stakers so that their net return is higher relative to non-stakers.
For bCAKE, which will be introduced to key v3 farms soon. Please see how bCAKE works for previous v2 Farms here. Moving to v3 Farms, bCAKE will stick with a similar mechanism, boosting your staked farming positions. CAKE Stakers who are contributing liquidity are doubly aligned with PancakeSwap - they are staking CAKE rewards and also contributing to PancakeSwap’s trading execution on important pools plus CAKE burn. bCAKE therefore creates the right alignment and rewards for this very important group of users.
Q: Will CAKE be directly deflationary after this proposal if we go for the biggest reduction?
A: It will be very close. Please refer to the table in the voting proposal - inflation falls to about ~5%.
Q: Besides the mentioned benefits, what future plans do you have for CAKE lockers?
A: PancakeSwap upgrades existing products and develops new products every quarter in our goal to be the leading all-in-one DeFi platform. Future plans will include CAKE lockers as much as possible to create more utility and preference for CAKE lockers. We also intend to go to other chains with our existing products, increasing the sources of trading volume which drive growth in the protocol revenue share to stakers.
Q: Why do we need low inflation? PancakeSwap’s differentiating factor is its high APR, which drives people to come and stake and use the platform.
A: Reduced inflation results in a lower number of CAKE tokens being generated over time. If PancakeSwap issues CAKE tokens at a rate that exceeds its growth, the protocol's value will be spread over an increasing number of tokens. Consequently, the value of each CAKE token will decrease over time as the value is distributed over a disproportionately larger number of tokens.
While a high APR may seem appealing at first glance, the additional CAKE tokens is counterbalanced by the increased distribution of value across more CAKE tokens.
Q: Wouldn't it be better to end the burning? Stop the emission and transfer the amount burned as revenue share in stable?
A: That would not be the case. Most of the protocol revenue is directed to burn because this is the most direct way to counterbalance the inflation of the CAKE token. Even if we were to have no more staking emissions on CAKE Syrup Pools (which is what some other leading DEXs have moved to), we still have emissions on Farms. A significant advantage of PancakeSwap is the significant runway of CAKE emissions which can help to attract TVL from DEX protocols which no longer emit liquidity mining rewards. As TVL is one important factor in driving trading volumes, CAKE emissions on Farms will help to attract TVL, which in turn generates trading volume on the AMM and the revenue that is now going to burn and into distribution to CAKE lockers.
If we were to end the burn completely, CAKE holders and stakers would lose a major source of buying pressure which balances CAKE inflation from Syrup Pools and Farms. They must depend 100% on users and protocols buying CAKE to counterbalance the inflation on farms. Lower value CAKE will then require more emissions to incentivize liquidity miners, which drives even more inflation.
Q: Does PancakeSwap plan to educate users, especially new users who may prioritize high APR, about the potential benefits and drawbacks of Ultrasound CAKE and how it differs from other deflationary mechanisms?
A: Yes. We intend to be broad-based, highlighting not just aspects about inflation but also the utility of the CAKE token. We expect this to be a long-term, ongoing effort.
Q: Are there other future utility features for locked CAKE?
A: We are trying to incorporate CAKE staking in our new products this quarter. Given Q2 development requirements (some of which we didn't announce in the roadmap), we will revisit our existing products and how we can further refine/add product utilities onto CAKE in Q3 and beyond.
Q: Could we put an end to the CAKE locked pool?
At a lower level of inflation than the current, PancakeSwap can support a small rate of inflation on the CAKE Syrup Pool, which serves as one utility of the CAKE token. Unlike many other DEXs, we dedicate protocol revenue to buyback-and-burn, which means that some CAKE inflation can be supported in the long term so as long PancakeSwap continues to make progress on its products.
CAKE staking allows us to align the benefits of token holders and the protocol. For example, a user who locks CAKE and provides liquidity contributes more to PancakeSwap than a user who only farms CAKE through liquidity mining. At a sustainable level of inflation, the protocol should incentivize users who are more aligned with protocol needs and growth by increasing the level of benefits to them.
Q: What is PancakeSwap’s future plan with regard to managing Syrup Pool and CAKE inflation in general?
A: The crypto market is very dynamic and is increasingly multichain. Therefore, we will operate on the basis of first/fundamental principles which guide PancakeSwap to better models. The key principles with regard to Syrup Pool and general inflation are:
Syrup Pool
- Competitive and attractive relative to other DEXs
- De-emphasize APR, emphasize and build on CAKE utilities to align protocol growth and CAKE stakers
- Rewarding long-term stakers more than short-term stakers due to higher alignment with PancakeSwap
Inflation
- Target deflationary CAKE
- Balance emissions with economic activity that generates CAKE burn
- Selective strategic CAKE emissions to gain market share across core products which drive CAKE burn in the longer-term
For previous discussion proposal
Q: Do CAKE voters only vote on the bolded options (1 CAKE or lower)?
A: No. All options on the voting proposal are open for voting, including ones are smaller cuts on the Syrup Pool. If the community does not want to reduce emissions on the CAKE Syrup Pool so quickly, the final proposal will take the higher emission rate options as the base to start and propose schedules of varying durations for reducing emissions on the CAKE Syrup pool
Q: Why are there many options available, including very aggressive cuts and also higher CAKE/block options?
A: This proposal aims to understand if the community wants to continue the gradual reduction of the Syrup Pool, opt for a faster but gradual rate of reduction, or make quick, aggressive cuts to stem inflation. The trade-off is between inflation and the speed of Syrup Pool reduction.
Q: If people vote for other emission reductions, is revenue sharing still on the table?
A: Yes. The proposal intends to set the structure for CAKE to move to a more sustainable model of substituting inflationary yield (which increases the amount of CAKE) with real / protocol yield (which does not affect CAKE supply)
The proposal does not automatically discard revenue sharing simply because the community is not voting on very low emissions. We want the community to consider the balance of inflationary yield, real/protocol yield against inflation on CAKE and the attractiveness of the CAKE Syrup Pool to attract future stakers to lock and present stakers to re-lock
Q: Is 0.35 / 0.5 CAKE/block the best option since it is the lowest option?
A: Not necessarily. The CAKE Syrup Pool currently has the largest allocation of CAKE emissions (see our tokenomics and the recently reduced allocation to the Trading Allocation), and contributes the most to overall CAKE inflation. (See below for detailed calculation) Therefore, cutting CAKE Syrup Pool emissions aggressively may seem to be the best option. However, CAKE Syrup Pool and its APR contribute to the CAKE token by encouraging CAKE holders to lock up their freely circulating tokens, reducing selling pressure. Regardless of the voting outcome on reduction, CAKE Syrup Pools will continue to attract stakers partially due to the APR it offers (ignoring all the other utilities that are and would be available).
Therefore, voters should consider what they view as a healthy balance between attracting new stakers (and existing stakers to relock) and overall inflation of the CAKE token, while Chefs work towards increasing CAKE burn from organic protocol revenues on new and existing products