Author: Weilin, PANews

On February 25, Binance announced that it would launch a test of the "Price Cap Mechanism" in its Launchpool pre-market trading, targeting the RedStone (RED) token. RedStone (RED) is the 64th project on Binance Launchpool, a multi-chain oracle across EVM and non-EVM chains. In this pre-market trading rule, Binance stated that to promote innovation and enhance user trading experience, it has introduced the "Price Cap Mechanism." However, this mechanism will only be tested during the issuance of the RED token, and it remains uncertain whether it will become a long-term feature.

Previously, following the Bitcoin crash on March 12, 2020, Huobi introduced partial liquidation and circuit breaker mechanisms, but these measures were not widely adopted by exchanges. Binance's former CEO, Zhao Changpeng, also stated at the time that implementing a circuit breaker mechanism in the cryptocurrency market was unlikely, as he believed it could only be applied in a completely monopolized market and was not feasible in a free market. This time, many crypto users have expressed differing opinions on the new mechanism.

Binance Tests Price Cap Mechanism in Pre-Market Trading with RED Token

According to Binance's announcement, users can start investing BNB, FDUSD, and USDC into the RED reward pool on the Launchpool website from February 26 at 08:00 (UTC+8), with the activity lasting for 2 days. Binance's pre-market trading will list RedStone (RED) on February 28 at 18:00 (UTC+8) and open the RED/USDT trading market.

To drive innovation and improve user trading experience, Binance has introduced a new feature in its pre-market trading market—the Price Cap Mechanism. This mechanism will limit the highest trading price in the pre-market for the first 72 hours, with the token price increase not exceeding a certain percentage of the initial opening price. After 72 hours of the pre-market opening, there will be no price restrictions, and trading will return to normal.

According to the guidelines, this price cap mechanism will only be tested during the issuance of the RED token, and it is currently uncertain whether this feature will become a long-term function in future pre-market trading.

According to the pre-market trading rules, the maximum individual holding limit is 5000 RED. The specific price cap rules are as follows:

• From February 28, 2025, 18:00 to March 1, 2025, 17:59 (UTC+8): The maximum order price is 200% of the opening price.
• From March 1, 2025, 18:00 to March 2, 2025, 17:59 (UTC+8): The maximum order price is 300% of the opening price.
• From March 2, 2025, 18:00 to 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 restrictions.

Additionally, RedStone (RED) has a total/max supply of 1 billion RED tokens, with a total of 40 million RED (4% of the maximum supply) available in the Launchpool and an initial circulating supply of 280 million RED (28.00% of the total supply).

The individual hourly reward caps are as follows:

• BNB Pool: 66,666 RED
• FDUSD Pool: 8,333 RED
• USDC Pool: 8,333 RED.

Is the Price Cap Mechanism Applicable to the Volatility of New Tokens?

The "Price Cap Mechanism" referred to by Binance can also be seen as a type of circuit breaker mechanism, but Binance has not specified the time for halting trading. This mechanism originates from traditional financial markets, where exchanges pause trading to control risk when the index volatility reaches a specified circuit breaker point. For example, the New York Stock Exchange has implemented three circuit breaker thresholds based on the decline of the S&P 500 index compared to the previous day's closing price—7% (Level 1), 13% (Level 2), and 20% (Level 3). When the first two thresholds are reached, trading is paused for 15 minutes. Under the third threshold, trading is halted.

Supporters argue that circuit breaker mechanisms help stabilize market sentiment and prevent investors from overreacting. The price cap mechanism tested by Binance aims to prevent extreme volatility during the listing of new tokens, thereby reducing drastic price fluctuations caused by speculation or manipulation. This mechanism is designed to make pre-market trading more controllable and predictable, providing the market with enough time to digest information and avoid severe fluctuations after opening.

However, opposing users believe that this mechanism may contradict the decentralized principles advocated by cryptocurrencies. The volatility of the crypto market is significant, and setting circuit breaker points is inherently challenging. Some users consider whether a circuit breaker mechanism could be integrated into the algorithm and design of the tokens. However, given the overall free-market fundamentalism of the cryptocurrency industry, these ideas may not be very realistic.

Moreover, the crypto market operates 24/7 and exists across multiple trading platforms. If one platform announces the implementation of a circuit breaker mechanism, it could exacerbate price discrepancies between different platforms, leading to arbitrage opportunities. Crypto user @ChequerCat666 pointed out, "It's useless unless this token is only listed on Binance, including DEX (decentralized exchanges) cannot have it." However, supporters believe that a mechanism similar to an OPEC alliance for international oil prices could be formed to jointly design and operate a circuit breaker mechanism.

User MetaverseDrug@MetaverseDrug stated that Binance's new mechanism might deviate from its original intention: "The original intention might be to prevent projects from becoming 'Christmas trees,' but in this market situation, well, there's no need to fear a short squeeze." Macro economist and crypto KOL Bai Ding @Geight16 believes that having an upward circuit breaker without a downward one makes the rules seem unreasonable.

At the same time, KOL DeFi miner @DeFi8362 expressed on platform X that the duration of the price cap mechanism is too long: "This depends on how Binance sets the opening price. If it's set too low, it could maintain a 400% increase for three days, directly freezing trading. If it's set high, this rule seems to lose its purpose; it feels like the former is more likely. My first encounter with a circuit breaker mechanism was when Huobi was launching new tokens. However, the circuit breaker time was very short, about ten minutes, and it had some effect in reducing unnecessary fluctuations after opening. It also allowed retail investors to think more rationally about the token price. But three days is a bit too long."

After the March 12 Bitcoin Crash, How Effective Was Huobi's Circuit Breaker Mechanism?

As mentioned earlier, on March 12, 2020, Bitcoin experienced a "black swan" price crash. Between March 12 and 13, Bitcoin's price fell by more than 50%, followed by a rebound. During this crash, BitMEX's liquidation amount exceeded $500 million within an hour. The platform also experienced downtime, which BitMEX attributed to a DDoS attack.

However, the trading suspension during BitMEX's downtime was quite similar to the stock market's "circuit breaker" mechanism, especially as trading was paused for several minutes during the most panicked investor sentiment, which led many in the industry to feel that BitMEX played a role in "circuit breaking" the market to some extent.

Huobi's cryptocurrency derivatives trading platform, Huobi DM (Huobi Derivatives Market), subsequently announced the introduction of a new liquidation mechanism that provides partial liquidation functionality rather than one-time liquidation. Through this mechanism, the system determines the margin ratio based on the calculated user exposure and automatically liquidates user positions in stages until the margin ratio is greater than zero.

Huobi DM explained: "With the new mechanism, the system will automatically begin to gradually liquidate users' positions in stages. The liquidation process also includes a circuit breaker function, which will stop liquidation when a significant difference is detected between the liquidation price and the market price."

However, Huobi's contract-related personnel clarified on Twitter that this is not the same as the circuit breaker mechanism in traditional markets, and liquidation will not stop trading.

Tushar Jain, managing partner of the cryptocurrency investment fund Multicoin Capital, stated at the time that a circuit breaker mechanism seems helpful for the cryptocurrency industry, as the price movements in the crypto market demonstrate the need to establish a circuit breaker mechanism. The collapse of the crypto market structure necessitates leading exchanges to work together to prevent a repeat of the situation.

But Binance's former CEO Zhao Changpeng also stated in March of the same year, "Circuit breaker mechanisms can only be used in completely monopolized exchanges. Bitcoin trading is a free market that can be traded on multiple exchanges; this simply doesn't work… Don't forget about decentralized exchanges, and who says 7% is the correct number? Why not 1% or 70%?"

Huobi's circuit breaker mechanism was not widely adopted by crypto exchanges afterward. This time, Binance will further explore the "Price Cap Mechanism" it is testing for the first time. What market effects will it bring? The subsequent developments are worth further attention.

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