Multi-angle analysis of Pancake: Business is back to a new high, what is its project valuation?
Research institution: Mint Ventures
Researcher: Xu Xiaopeng
Update time: 2021.11.11 15:30
1. Key points
1.1. Core investment logic
As the leading DEX on BSC, PancakeSwap’s core business indicators such as TVL and trading volume have returned to historical highs, and its profitability has been significantly boosted. Since the middle of the year, CAKE has reduced its token production by about 30%, but its market share on BSC has continued to expand. Thus, its leading position has been further consolidated, without leaving too much opportunity for challengers, and its moat has been further tested in this process.
In addition, the NFT market, the lending business, the acceleration of IFO, and the increase of Binance’s support may all become new drivers for the growth of Pancakeswap.
It is worth emphasizing that Pancakeswap is at the core of Binance Group’s decentralization strategy and is closely related to the development of BSC. As the DEX version of Binance Exchange, its long-term development is worth looking forward to.
1.2. Main risks
The BSC ecosystem continues to lose in the public chain competition, and the crypto market is turning into a bear market. For details, please refer to the section of “Business Analysis — Risk”.
1.3. Valuation
From the perspective of valuation, the current market cap of CAKE is at a low level during the year regardless of the comparison of core business data and market cap, or PE, PS and other indicators. Horizontally speaking, the decline of Cake’s valuation level is similar to that of other Defi projects, which is related to the overall decline of Defi projects’ valuation level. Therefore, it is still not appropriate to be overly optimistic about its rebound in the short to medium term.
*All opinions in this article should not be used as investment advice.
2. Basic situation of the project
2.1. Project business scope
Pancakeswap (hereinafter referred to as PCS) is the trading platform with the AMM mechanism on BSC. Its main business includes the trading of homogenized crypto assets, the trading of NFT assets, and the issuance of assets through IFO. In addition to its main business, PCS also operates prediction businesses including lottery or predicting price rise or fall.
2.2. Business situation
Asset trading based on the AMM model is the main business of PCS and the core value source of the project at present. We will focus on it in this article and observe it from the perspective of multiple business indicators.
2.2.1. TVL: Liquidity
The liquidity level of SWAP represents the retention intention of market-making funds. Under the same mechanism, the more the liquidity of the AMM platform, the better the overall trading experience of users, capturing the trading behavior of users to the greatest extent. Of course, through the improvement of the mechanism, some Swaps can provide lower slippage within a certain range of trading volume, such as DODO using PMM mechanism and Uni V3 supporting customized price range for liquidity market-making. However, most SWAPs with the highest trading volume on BSC currently still adopt the traditional AMM mechanism at present.
The Info data of PCS before April was not update until late April. Therefore, we only observe its TVL from April 2021 to present. The peak TVL value of PCS appeared in early May, in the range of US$7 billion. Later, due to the overall collapse of the crypto market and the fierce competition of the new public chain ecology for the overall market liquidity, PCS’s TVL has not returned to the high point for a long time and is in a state of shock and recovery. In early November, its TVL began to rebound rapidly, and now it is close to the high of US$7 billion in May. It is worth mentioning that during this period, its core token Cake also experienced multiple rounds of production reduction, but the impact on its TVL was not obvious.
2.2.2. Trading volume
Trading volume is a more convincing indicator than TVL. It not only directly determines the cash flow income of the protocol, but also directly affects the market-making intention of market makers.
Pancake’s annual peak of trading volume also occurred in May, but the largest volume appeared in late May, which is the period of the crypto market crash. In addition to the transactions caused by market panic, there was also a large number of collateral liquidations during this period, and this part of abnormal trading volume should be eliminated. Therefore, so the trading volume in the early May is more worthy to be used as the reference data for the normal high point. Since the end of October, the trading volume of Pancake has risen rapidly. Since November, the overall average daily trading volume has risen by more than 100% compared to October, reaching the same level as the peak in May, i.e., the range of US$1.5 to 2 billion.
2.2.3. Capital turnover ratio
The capital turnover ratio reflects the utilization efficiency of the market makers’ funds on the AMM platform. The higher the turnover ratio, the faster the capital turnover of market makers is, the higher the commission rate of LP is, and the more attractive the platform is to LP. The author has calculated the LP capital turnover ratio of PCS for several months, and the details are as follows:
Since June, although the crypto market has gradually recovered, the daily capital turnover ratio of Pancakeswap has been hovering around 14%. Until November, its capital turnover ratio has increased substantially. On the one hand, this is related to the fact that BTC continued to hit new highs in November and the enthusiasm for market transactions gradually increased. On the other hand, the upsurge of dog token and Meme projects on BSC as well as the explosion of Gamefi and metaverse concept have further ignited the transaction enthusiasm of users.
2.2.4. Number of active\trading users
According to the official monthly data disclosed on November 8th, the user data of PCS in October is as follows:
• Independent trading users: 4.47 million (a month-on-month increase of 39.1%)
• Independent web users: 12 million (a month-on-month increase of 18%)
Data source: PancakeSwap October Recap — Bounding into Year 2!
According to the current ranking data of Dappradar, PCS leads all dApps with 4.86 million 30-day active addresses.
2.2.5. Transaction data of NFT market
On September 30, 2021, PCS officially launched its NFT trading business. As of November 8th, the total trading volume reached 102,208 BNB (approximately US$60 million). At present, PCS’s NFT trading market is still in the whitelist mode, in which an application needs to be submitted and approved before it can be put on sale.
The NFT series with the largest sales at present are the Pancake Squad and Pancake Bunnies series issued by PCS itself. The cumulative trading volume is 72,998 BNB and 28,606 BNB respectively, accounting for the absolute majority of the entire trading market.
2.2.6.IFO
The issuance of PCS’ IFO has accelerated recently, and the wealth effect of the recent launch of DAR is obvious. It is worth noting that DAR has just been launched as Binance’s new mining launchpad before PCS’ IFO. Its IFO price on PCS also leaves sufficient profit margins for participants (although due to the “involution” (fierce competition), everyone cannot get much), which may be understood as the resource delivery of Binance to PCS.
In addition to trading business, lottery, and market prediction (guessing the rise and fall), PCS has a “lending & borrowing” item on its to-do list, which has low priority at present.
Considering that there are not many large lending platforms on BSC and the largest platform Venus has bad debt problems to be solved, PCS is expected to directly challenge Venus with its brand advantage and huge user base, if it enters the lending market.
2.3. The team
The team members of PCS remain completely anonymous. Although the project’s Medium regularly updates work interviews with people from different parts of the project, as well as news of new members joining the team, we do not know their actual identities and location distribution. According to public information, the PCS project was officially launched in September 2020. Before September 2021, its project leader (nickname “Chef”) was Hops , however, from the end of September, the project leader was changed to Snowball, and Hops became a consultant (there are more detailed rumors and statements on the market, and here we only rely on public information). After the replacement of the new core team member, Binance has shifted more resources to PCS. In addition to the afore-mentioned IFO project delivery, the author also learned from interviews and conversations with some BSC projects that BCS is very happy to see the in-depth collaboration between its ecological projects and PCS.
In addition to existing team members, the project is still recruiting positions including social media marketing manager, BD manager, product leader, front/back end engineer, UI/UX designer, etc.
3. Business analysis
3.1. Industry space and potential
The track where PCS is located is a decentralized trading platform. Trading is the lowest underlying setting in the application layer of crypto business. It can be said that the overall scale of crypto business will directly determine the market space of the decentralized trading platform.
According to Debank data, the daily trading scale of the overall DEX market is about US$6.89 billion, in a relatively high position during the year, but there is still a certain distance from the peak trading range of US$8–10 billion in April and May.
3.2. Project competition landscape
The business scale of PCS is directly affected by three aspects: 1. The crypto market cycle; 2. The scale of the BSC ecosystem where it is located; 3. The DEX competition landscape in the BSC section.
In the short term, the current overall market is gradually recovering after a sharp drop in May. The total market cap of crypto assets has exceeded US$3 trillion, reaching a new high again. However, trading volume and other indicators still lag behind the previous high range, thus there is still upward potential.
The market share of BSC in terms of TVL reached its peak in early May, nearly 20% of all public chain TVL. Later, with the rise of new public chains such as Solana, Terra, Avalanche, Fantom, etc., its total share has gradually lost, now it stands at about 7.9%. Although its total volume of TVL is still rising gradually, it has not yet returned to the high point of May in terms of market share and total amount. The ecological space of BSC will be a key constraint on the future development of PCS.
However, BSC has recently taken frequent ecological actions, including the launch of an ecological incentive plan worth US$1 billion, which has not been fully implemented so far. In addition, it is rumored that BSC is preparing a major performance upgrade to improve its network capacity and user experience.
In addition to the rumors of performance improvement, there are also rumors that BSC will build an exclusive side chain for games, derivatives and other high-frequency applications. However, Binance has not made any public announcements about the above plans so far.
If these rumors are true, BSC will undoubtedly become more attractive to developers, users, and funds as its performance improves, and the BSC ecosystem will also attract more games and derivatives applications.
In addition to the objective influences of the market cycle and BSC ecosystem scale, the market share of PCS in the BSC ecosystem is more worthy of attention.
The top 5 comprehensive AMM Swaps currently ranked by TVL on BSC include: PancakeSWAP, Mdex, Biswap, Apeswap, Bakeryswap. Their TVL and market share changes are as follows:
We find that despite the continuous emergence of new Swap projects on BSC and the gradual reduction of Cake’s production, its TVL market share has not declined, but has continued to expand.
This confirms the moat of PCS from the side, which may come from the users’ path dependence on transaction behavior (users who trade on BSC will first go to PCS for search) and brand effect. This path dependence will adversely affect the choices of market-making fund placement of all project parties, leading to more and more new projects preferring to make market on PCS, which further strengthens the users’ mind and behavior of “first go to Pancake for trading”. In the recent hot BSC Meme coin boom, most new projects choose to place their initial liquidities on PCS.
3.3. Token model analysis
The only token of PCS is Cake. Cake is distributed by Fair Launch, without private placement and no share reserved for the team. There is no upper limit on the total number of tokens. The current net output of each block is about 14.5 (after deducting the additional burn of the lottery part, the actual output is about 12.94), and the net daily output is about 371,600 Cakes. It has decreased by 25.9% from the daily output of 501,200 in the author’s last research report of “Comprehensive comparison of the token models, cash flow and moats of the top ten Defi blue chips: Who is the king of value capture?” (Attention, when it is published on the chainnews, the link here should be replaced with the chainnews article link: https://www.chainnews.com/articles/617625387966.htm). According to CoinGecko data, the current total circulation of Cake is about 241 million (2021.11.11).
3.3.1. Cake allocation
As the liquidity incentive token of the project, Cake’s fate and burn are quite complicated. In fact, most of the produced tokens have been directly burned, and the specific parameters and mechanisms are constantly being update. Please see:
When the output and the portion directly burned after the output are offset each other, its current distribution can be simplified as follows:
We find that most of the cake (77.5%) produced daily was actually provided to CAKE staking users. That is to say, as long as you hold Cake and stake it, 77.5% of the inflation in the newly issued CAKE has actually been offset by your token rewards. If this part is deducted, the actual daily inflation of CAKE is only around 84,600, which is used for farm liquidity and lottery pool incentives.
3.3.2. The value capture of Cake
The value capture of Cake comes from the buyback and burn of project revenue, as well as the usage scenarios of token scenario, including:
· All or partial income of the PCS protocol is used to buyback and burn Cake, including:
o All CAKE required for personal data and face minting will be burned
o 20% of Cake used to purchase lottery tickets will be burned
o All Cakes raised by IFO will be burned
o 3% of bet funds on the prediction market will be burned
o The 2% performance fee charged for the automatic reinvestment service of Cake’s single-currency staking (the fee drawn from the reinvestment) will be completely burned
o 0.05% of the trading volume of the token trading platform will be bought back and burned (the handling fee is 0.25%, and the burning accounts for 20% of the total handling fee)
o All Cake used for bidding on the winning project in the farm auction will be burned
o 2% of the handling fee on the NFT trading market will be completely bought back and burned
· Stake in the syrup pool to obtain free tokens for cooperative projects
· Stake Cake in the syrup pool to get new Cake output, and the current APR is about 55%
· Used to participate in proposal voting and governance
· Used to participate in lottery, create personal files and NFT minting and other functions
So, how many Cakes are actually bought back and burned by PCS businesses every week? According to the latest buyback and burn records on November 8th, the weekly total amount of bought back and burned CAKE from various businesses is 814,000, and the corresponding protocol income attributable to CAKE holders is US$7.351 million.
Just from the data literally, the weekly burn amount of 814,000 is still far from the output of 37.16*7=2.6012 million. However, as mentioned above, up to 77.5% of the 2.612 million tokens will be allocated to the staker of Cake. While expanding the total amount, this part of CAKE also will flow back to the pockets of CAKE holders, thus it will not form a real “inflation” for the CAKE holders.
If the 77.5% of the additional issuance to CAKE holders is deducted, then the weekly output of CAKE is only the incentive portion allocated to liquidity mining and lottery. The weekly CAKE output of this part is 592,200, less than the burn amount of 814,000, thus it has actually achieved deflation.
Perhaps the above conclusion will be better understood in another way:
If starting from tomorrow, CAKE cancels all the output rewards given to CAKE staking by the syrup pool, and the output rewards for liquidity mining + lottery pools remain unchanged, then the daily output of CAKE will become as follows:
Since the cancellation of the reward for the CAKE staking will not affect the liquidity and lottery rewards, the business income of PCS will not decrease, and it can still maintain the burn amount of 814,000 pieces. In this case, weekly burn amount > weekly inflation, then CAKE officially enters the state of deflation.
This means that if the PCS wants to achieve deflation, it only needs to suspend issuing additional CAKE to CAKE users so as to enter the deflation state.
One might argue that, if CAKE’s staking reward is cancelled, CAKE holders will suffer a loss. But in fact, issuing additional CAKE to staking users as a reward does not bring incremental value to token holders in nature.
This is like an example of a listed company. When its cash flow income remains unchanged, this company has been issuing new shares and gifting them to old shareholders according to the shareholding ratio. The number of shares in the hands of old shareholders has indeed increased, but the value of each share has been diluted due to the additional issuance, thus the financial value of its total holdings has not changed.
The above share-gifting process is similar to PCS issuing additional CAKE to token holders: the number of tokens increases, but the value of a single token is diluted. In the formula of Quantity × connotation value of a single token = total value, one product factor increases but the other decreases, so the total value remains unchanged before and after.
3.3.3. Brief summary of token model analysis
Compared with other projects, the token model of PCS does not have much innovation, adopting the usual operating profit for buyback and burn model. Due to its unlimited issuance mode and the “self-mining” output mode of a single currency, the inflation scale looks terrifying. However, if the “self-mining” output is deducted, the current strong income of PCS has made its tokens enter the actual “deflationary stage”.
3.4. Risk
3.4.1. “Blood loss” (market share shrinkage) of BSC ecosystem
If the BSC ecosystem continues to shrink its market share due to its underperformance in competition with other public chains, or if its large market share decreases due to the slowdown of users and capital inflows because of regulatory reasons, the growth of PCS will peak.
3.4.2. The crypto market cycle turns bearish
Although various indicators show that the business situation of PCS has improved rapidly, there is still the possibility that CAKE has not started before the end of the bull market. Considering that the market valuation of the established Defi projects is in a continuous downward channel in the second half of the year, the return of CAKE’s valuation also needs the market’s upward valuation of DeFi as a support. Although the author believes that the view that “asset prices are a voting machine in the short term and a weighing machine in the long term” is also valid in the crypto market. However, if the market falls into a bear market before it has time to weigh and valuate the project again, the decline of business data caused by the market depression will undoubtedly further reduce the market cap performance of PCS.
4. Preliminary valuation
4.1. Five core questions
What business cycle is the project in? Maturity stage or the early and middle stage of development?
Although the business model of the project has basically matured, it is still in the early and middle stages of the track in terms of the overall development stage of the crypto business. There is still a large space for development in the future. Among them, new businesses such as NFT market and lending may become the second growth curve of the project.
Does the project have a solid competitive advantage? Where does it come from?
PCS has a solid competitive advantage on BSC. On the one hand, it comes from user habits and their path dependences on PCS transaction behaviors, as well as the project brand. As a result, user transaction and market making of the project mutually reinforce each other, leading to a large number of projects choosing PCS as their primary liquidity platform. Secondly, Binance’s support for PCS in terms of resources and attitude is also an invisible core competitiveness.
Is the medium and long-term investment logic of the project clear? Is it in line with the industry trend?
The trading platform is the underlying setting of the application layer. With the continued vigorous development of crypto business, its ceiling is far from coming. The medium and long-term investment logic of PCS is very clear.
What are the main variables in the operation of the project? Are these variables easy to quantify and measure?
The variables mainly come from the competitiveness of the project itself and the ecological scale of the BSC where it is located. We can observe the core indicators of the project such as trading volume, TVL, capital turnover speed, etc. The BSC ecosystem can be observed by some indicators such as the number of active addresses on the chain, the number of transfers, and TVL.
What is the management and governance of the project? What is the level of DAO?
The project has adopted DAO governance to initiate proposals and vote. On the governance proposal page, proposals from the community and proposals from the core team are separated by two columns. Overall, its governance work is quite satisfactory, and most of the proposals from the core team have been passed.
4.2. Valuation level
The business logic of PCS is clear, and it has continuously stable protocol income. Based on the comparison of its circulating market cap with other core indicators, as well as the longitudinal comparison of its PE\PS indicators based on its past data, the author will observe its current valuation level.
4.2.1. Market cap\core indicators: MC\TVL, MC\VOL
Using the ratios of the circulating market cap to TVL and trading volume as observation indicators, we can compare them with previous indicators of the project. The lower the indicator, the lower the valuation level, as follows:
Overall, Cake’s valuation level is currently at the lowest level in this year, both in terms of TVL and trading volume.
4.2.2. PE\PS
4.2.2.1. Longitudinal comparison
We can directly observe the PE and PS of PCS through the data of Token terminal, as follows:
The green range belongs to the abnormally steep rise in trading volume caused by the market plunge, which should be considered to be removed. The same is as below.
On the whole, the PS and PE of Cake are in the low range of this year compared with its own.
4.2.2.2. Horizontal comparison
Based on the PS indicator, we compare PCS with Uniswap and Sushiswap and find that Cake’s PS valuation is close to Sushi. However, it has always maintained a large gap with Uni, the king of Ethereum.
4.3. Summary of preliminary valuation
As the leading DEX on BSC, PancakeSwap’s core business indicators such as TVL and trading volume have returned to historical highs, and its profitability has been significantly boosted. Since the middle of the year, CAKE has reduced its token production by about 30%, but its market share on BSC has continued to expand. Thus, its leading position has been further consolidated, without leaving too much opportunity for challengers, and its moat has been further tested in this process.
In addition, the acceleration of NFT market, lending and IFO as well as the strengthening of Binance’s support are likely to become the new driving force for the growth of Pancakeswap, drawing the second and third growth curves for it.
It is worth emphasizing that Pancakeswap is at the core of Binance Group’s decentralization strategy and is closely related to the development of BSC. As the DEX version of Binance Exchange, its long-term development is worth looking forward to.
From the perspective of valuation, the current market cap of CAKE is at a low level during the year regardless of the comparison of core business data and market cap, or PE, PS and other indicators. Horizontally speaking, the decline of Cake’s valuation level is similar to that of other Defi projects, which is related to the overall decline of Defi projects’ valuation level. Therefore, it is still not appropriate to be overly optimistic about its rebound in the short to medium term.
5. Reference
Project market cap
Project data
https://pancakeswap.finance/info
https://www.tokenterminal.com/
Industry data
Research report
Comprehensive comparison of the token models, cash flow and moats of the top ten Defi blue chips: Who is the king of value capture? (Attention, when the chain news was published, the link here was replaced with the chain news article link: https://www.chainnews.com/articles/617625387966.htm).
