Author: Weilin, PANews
On February 25, Binance announced that it will launch a "price limit" mechanism test in the Launchpool pre-trading, and this test will target the RedStone (RED) token. RedStone (RED) is the 64th project of Binance Launchpool, a cross-EVM and non-EVM chain multi-chain oracle. In this pre-trading rule, Binance stated that in order to drive innovation and improve the user trading experience, it has launched the "Price Cap Mechanism". However, this mechanism will only be tested during the issuance of the RED token, and it is not yet determined whether it will become a long-term function.
Previously, on March 12, 2020, during the Bitcoin crash, Huobi had subsequently introduced a partial liquidation and circuit breaker mechanism, but these measures were not widely adopted by the exchanges. CZ, the former CEO of Binance, also said at the time that setting up a circuit breaker mechanism in the (cryptocurrency market) is unlikely, as he believes it can only be implemented in a completely monopolized market, and cannot be operated in a free market. This time, many cryptocurrency users have expressed different views on the new mechanism.
Binance tests the price limit mechanism in pre-trading, with RED token as the first attempt
According to the Binance announcement, users can start from 08:00 on February 26 (UTC+8) to deposit BNB, FDUSD and USDC into the RED reward pool on the Launchpool website to obtain RED, and the activity will last for 2 days. Binance's pre-trading will list RedStone (RED) at 18:00 on February 28 (UTC+8) and open the RED/USDT trading market.
In order to drive innovation and improve the user trading experience, Binance has launched a new feature in the Binance pre-trading market - the price limit mechanism. This mechanism will limit the maximum trading price in the pre-market in the first 72 hours, and the token price increase will not exceed a certain percentage of the initial opening price. After the first 72 hours of the pre-market opening, there will be no more price restrictions, and trading will resume normally.
According to the prompt, this price limit mechanism is only being tested during the issuance of the RED token, and it is currently uncertain whether this feature will become a long-term feature of the future pre-market.
According to the pre-trading rules, the individual maximum holding limit is 5,000 RED. The specific price limit rules are as follows:
February 28, 2025 18:00 - March 1, 2025 17:59 (UTC+8): The maximum order price is 200% of the opening price
March 1, 2025 18:00 - March 2, 2025 17:59 (UTC+8): The maximum order price is 300% of the opening price
March 2, 2025 18:00 - March 3, 2025 17:59 (UTC+8): The maximum order price is 400% of the opening price
After March 3, 2025 18:00 (UTC+8): No price limit
In addition, RedStone (RED), total/maximum supply: 1 billion RED, Launchpool total: 40 million RED (4% of the maximum token supply), initial circulating supply: 280 million RED (28.00% of the total supply).
The individual hourly reward cap is as follows:
BNB pool: 66,666 RED
FDUSD pool: 8,333 RED
USDC pool: 8,333 RED.
Is the price limit mechanism applicable to the crypto market to deal with the surge and plunge of new tokens?
Binance's so-called "price limit mechanism" can also be seen as a kind of circuit breaker mechanism, but Binance has not yet clearly stated the time when trading will be suspended. This mechanism originally came from the traditional financial market, which refers to the measure taken by the exchange to temporarily suspend trading in order to control the risk when the index fluctuation reaches the specified circuit breaker point. Taking the New York Stock Exchange as an example, the New York Stock Exchange has implemented three circuit breaker thresholds, measuring the decline in the S&P 500 index from the previous trading day's closing price - 7% (Level 1), 13% (Level 2) and 20% (Level 3). When the first two thresholds are reached, trading will be suspended for 15 minutes. And at the third threshold, trading will be stopped.
Supporters believe that the circuit breaker mechanism helps stabilize market sentiment and prevent investors from overreacting. The price limit mechanism tested by Binance this time aims to prevent the surge and plunge of new tokens when they are listed, thereby reducing extreme fluctuations and avoiding price surges caused by speculation or manipulation. This mechanism is intended to make the pre-market trading more controllable and predictable, and to provide the market with enough time to digest information and avoid violent fluctuations after the opening.
However, opposing users believe that this mechanism may go against the decentralized concept advocated by cryptocurrencies. The volatility of the crypto market is relatively large, and the setting of circuit breaker points is challenging in itself. Some users consider whether circuit breaker mechanisms can be incorporated into the algorithms and designs of cryptocurrencies. But given the overall free market fundamentalism attitude of the cryptocurrency industry, these ideas are probably not very realistic.
In addition, the crypto market is 24/7 and there are multiple trading platforms. If a platform announces the implementation of a circuit breaker mechanism, it may lead to an increase in price differences between different platforms, thereby triggering arbitrage behavior. Crypto user @ChequerCat666 pointed out: "It's useless unless this token is only listed on Binance, including DEXs (decentralized exchanges)." But supporters believe that it may be possible to form a mechanism similar to the OPEC international oil price alliance to jointly design and operate the circuit breaker mechanism.
User MetaverseDrug@MetaverseDrug said that this new mechanism of Binance may deviate from its original intention: "The original intention may be to prevent the project from being a 'Christmas tree', but it has appeared in this market situation, well, don't be afraid of being squeezed out." Macro-economic and crypto KOL Bai Ding@Geight16 believes that only the upward circuit breaker, without the downward circuit breaker, makes the rules seem unreasonable.
At the same time, KOL DeFi Xiao Kuangong@DeFi8362 stated on the X platform that the effective period of this price limit mechanism is too long: "In this way, it depends on how Binance sets the opening price. If it is set too low, the 400% limit will be in effect for three days, and the trading will be directly suspended. If it is set too high, this rule may not be of much use, and it seems to be the former. The first time I encountered the circuit breaker mechanism was when Huobi was launching new projects. However, the circuit breaker time was very short, about 10 minutes, and it still had some effect, which could reduce unnecessary volatility after the opening. It can also make retail investors think relatively rationally about the coin price. But three days is a bit too long."
After the Bitcoin crash on 3·12, how effective was Huobi's circuit breaker mechanism?
As mentioned above, on March 12, 2020, the price of Bitcoin experienced a "black swan" crash, with the price dropping by more than 50% between March 12 and 13, and then rebounding. During this crash, BitMEX's liquidation amount exceeded $500 million in one hour. The platform also experienced downtime, which BitMEX attributed to a DDoS attack.
However, BitMEX's suspension of trading during the downtime was very similar to the "circuit breaker" mechanism in the stock market, especially the suspension of trading for dozens of minutes when investor sentiment was most panicked, which also prompted many in the industry to reflect, believing that BitMEX had to some extent played the role of "circuit breaker" in the market.
Huobi's cryptocurrency derivatives trading platform Huobi DM (Huobi Derivatives Market) subsequently announced the launch of a new liquidation mechanism, providing partial liquidation function instead of one-time liquidation. Through this mechanism, the system will determine the user's exposure based on the calculated margin ratio, and automatically liquidate the user's position in stages until the margin ratio is greater than zero.
Huobi DM explained: "With the new mechanism, the system will automatically start to liquidate the user's positions in stages. The liquidation process also includes a circuit breaker function, which will stop the liquidation when a large difference is detected between the liquidation price and the market price."
However, the person in charge of Huobi's contract business also clarified on Twitter that this is not the same as the traditional market circuit breaker mechanism, and the liquidation will not stop trading.
Tushar Jain, a managing partner of the cryptocurrency investment fund Multicoin Capital, said at the time that the circuit breaker mechanism seems to be helpful for the cryptocurrency industry, and the price trend of the cryptocurrency market has proved that the entire cryptocurrency industry needs to establish a circuit breaker mechanism. The collapse of the cryptocurrency market structure shows that the leading exchanges need to work together to prevent a recurrence.
But CZ, the former CEO of Binance, also stated in March of the same year that "the circuit breaker mechanism can only be used in a completely monopolized exchange, Bitcoin trading is a free market that can be traded on multiple exchanges, this won't work... Don't forget there are also decentralized exchanges, and who says 7% is the right number, why not 1% or 70%?"
The circuit breaker mechanism of CZ has not been widely adopted by crypto exchanges afterwards. This time, Binance will further explore the "price limit mechanism" that it first tested. What will be the market effect? The subsequent dynamics are worth further attention.
