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Why Use Liquidity Pools Instead of Platforms Like Binance?

  • Writer: Lara Hanyaloglu
    Lara Hanyaloglu
  • Feb 14
  • 3 min read

Great question! But first lets first shortly recap what a liquditiy pool is:


Imagine you are going to a currency exchange shop to swap euros for dollars. That shop needs a pile of both euros and dollars to make the trade. In crypto, that pile of money is called a liquidity pool.

Who Provides the Money in the Pool?

  • Regular people like you and me! Anyone can add their crypto to these pools to help others trade.

  • For example, in a BNB/CAKE liquidity pool, people deposit BNB and CAKE tokens together.

Why Do People Provide Liquidity?Because they earn a small fee every time someone trades from the pool. It’s like getting paid for renting out your money.


Both centralized platforms (like Binance) and decentralized platforms (like Uniswap or PancakeSwap) let you trade crypto, but they work differently. Here’s why some people prefer liquidity pools on DEXsinstead of using a big exchange like Binance:


💡 1. Full Control of Your Crypto (No Middleman)

  • On Binance: Binance holds your crypto (custodial). They manage your keys, and if Binance freezes your account or faces issues, you can’t access your funds.

  • With Liquidity Pools (Uniswap, PancakeSwap): You use a non-custodial wallet (e.g., MetaMask, Trust Wallet), so only you control your crypto. No one can freeze your account or stop your trades.


💡 2. Access to New and Rare Tokens First

  • On Binance: Binance only lists well-known coins. You can’t buy new or small project tokens early.

  • With Liquidity Pools: You can buy brand-new tokens right when they launch. Many DeFi, meme coins, and GameFi tokens are only on Uniswap or PancakeSwap first.


    For example: Tokens like SHIB (Shiba Inu) started on Uniswap before Binance listed them.


💡 3. Earn Money Through Liquidity Pools (Passive Income)

  • On Binance: You only make money if your coin’s price goes up, or if you stake.

  • With Liquidity Pools: You can earn trading fees by becoming a liquidity provider (LP). Every time someone swaps tokens in your pool, you get a small fee. It’s like earning rent on your crypto.


💡 4. No KYC (Privacy)

  • On Binance: You must give your personal information (KYC) to trade.

  • With Liquidity Pools: You don’t need to share your ID. Just connect your wallet and start trading—complete privacy.


💡 5. Faster and Cheaper for Some Trades

  • On Binance: For small trades, Binance is cheap. But for rare tokens or large trades, you can face high withdrawal fees.

  • With Liquidity Pools: On low-fee networks like PancakeSwap (BSC), swaps are very fast and cheap compared to Ethereum or Binance withdrawal fees.


💡 6. Participate in DeFi Ecosystems

Liquidity pools are part of the DeFi (Decentralized Finance) world, which offers:

  • Yield farming: Earn more tokens by staking LP tokens.

  • Staking: Earn passive income from your crypto.

  • Lending/Borrowing: Use your crypto as collateral without selling it.


⚠️ But Be Careful of These Risks in Liquidity Pools:

  1. Impermanent Loss: You can lose potential profits if token prices change a lot.

  2. Scams and Rug Pulls: Some new tokens are scams. Research before adding liquidity.

  3. High Gas Fees: On networks like Ethereum (Uniswap), fees can be high. Use PancakeSwap (BSC) or other Layer 2 solutions for cheaper transactions.


✅ When to Use Binance vs. Liquidity Pools:

Scenario

Use Binance (Centralized)

Use Liquidity Pools (DEX)

Trading Popular Coins (e.g., BTC, ETH)

✅ Best for low fees

✅ Works, but can be more expensive

Buying New/Small Tokens Early

❌ Limited availability

✅ DEXs get new tokens first

Privacy (No KYC)

❌ KYC Required

✅ No KYC needed

Earning Passive Income (Fees/LP)

❌ Limited options

✅ Earn from liquidity pools

Full Control of Funds

❌ Exchange controls funds

✅ You own your wallet and keys

Low Fees for Small Trades

✅ Usually cheaper

✅ PancakeSwap on BSC is cheap

Participating in DeFi (Staking, Yield Farming)

❌ Limited DeFi options

✅ DeFi opportunities everywhere

In a Nutshell:

  • Use Binance for easy trading of big coins like BTC or ETH and if you prefer a simple experience with customer support.

  • Use Uniswap or PancakeSwap for new tokens, passive income from liquidity pools, privacy, and full control of your funds.

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