What happened

Popular decentralized finance (DeFi) application PancakeSwap (CAKE 2.75%) plunged on Tuesday after it underwent a significant update. The team behind the project changed the way PancakeSwap token holders can earn yield on their investment, and the change didn't seem to be well received. At 10:30 a.m. ET, PancakeSwap tokens had declined 11% in value over the previous 24 hours.

So what

Cryptocurrency investors often choose to earn yield on their holdings through a process called staking. PancakeSwap, an automated market maker (AMM) DeFi app, provided several ways for holders to do this already. But yesterday, it changed how staking works, and the old staking pools were retired. And that's about when the price of PancakeSwap tokens started falling.

A frustrated business person looks at a falling investment chart on a laptop.

Image source: Getty Images.

Starting yesterday, PancakeSwap token holders can earn yield with flexible staking or fixed-term staking. According to the team's official social media accounts, 15% of Cake tokens being staked in the new pools were fixed term, taking advantage of the significantly higher yields. However, this implies most Cake holders are opting for flexible staking, which can be withdrawn after 72 hours. In other words, there appears to be at least a little trepidation about committing to holding tokens for a long time.

Additionally, according to DeFi Llama, the total amount of Cake tokens being staked has declined in recent days. This perhaps signals that previous holders preferred the old system and are now moving on.

Now what

The updated staking mechanics are just one part of a revamped roadmap. More updates are expected soon, including updated tokenomics in May, according to its official Discord. 

Speaking of tokenomics, PancakeSwap's new staking mechanics could theoretically reduce circulating supply, by locking up more tokens for longer periods, as well as increase the token's burn rate. That could cause the cryptocurrency to rise in the long term. However, that's certainly not what's playing out for cryptocurrency investors today.