Binance tests the pre-market trading "limit-up mechanism" for the first time, with RED potentially rising up to 400% in the three days before opening, and its applicability remains to be tested by the market

Author: Weilin, PANews

On February 25, Binance announced the launch of a "Price Cap Mechanism" test in its Launchpool pre-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-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, during 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 Changpeng Zhao 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-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, 08:00 (UTC+8), for a duration of 2 days. Binance's pre-trading for RedStone (RED) will be listed on February 28, 18:00 (UTC+8), and the RED/USDT trading market will be opened.

To drive innovation and improve user trading experience, Binance has introduced a new feature in its pre-trading market—the Price Cap Mechanism. This mechanism will limit the highest trading price in the pre-trading 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-trading 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 the future pre-trading market.

According to the pre-trading rules, the maximum personal holding limit is 5000 RED. The specific price cap 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 restrictions.

In addition, RedStone (RED) has a total/max supply of 1 billion RED, with a total of 40 million RED in Launchpool (4% of the maximum token supply) and an initial circulation of 280 million RED (28.00% of the total token supply).

The hourly reward caps for individuals 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 clearly defined the time for stopping trading. This mechanism originated from traditional financial markets, where exchanges take measures to suspend trading when the index volatility reaches a specified circuit breaker point to control risk. For example, the New York Stock Exchange has implemented three circuit breaker thresholds, measuring the drop in 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 suspended for 15 minutes. At the Level 3 threshold, trading will stop.

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

However, opposing users argue that this mechanism may contradict the decentralized philosophy advocated by cryptocurrencies. The volatility of the crypto market is significant, and setting the circuit breaker point itself is challenging. Some users consider whether a circuit breaker mechanism can be incorporated into the algorithm and design of the token. However, given the overall fundamentalist attitude of the cryptocurrency industry towards free markets, 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 may 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 across the entire network, including DEXs (decentralized exchanges)." However, supportive users believe that it is possible to form a coalition mechanism similar to OPEC for international oil prices to jointly design and operate a circuit breaker mechanism.

User MetaverseDrug @MetaverseDrug expressed that Binance's new mechanism might deviate from its original intention: "The original intention might be to prevent the project from becoming a 'Christmas tree,' but given the current market conditions, it seems 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 such rules seem unreasonable.

At the same time, KOL DeFi miner @DeFi8362 stated on platform X that the duration of this price cap mechanism is too long: "It depends on how Binance sets the opening price. If it's set low, there could be a 400% increase for three days, directly sealing the market. 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 during Huobi's new token launches. However, the circuit breaker time was very short, probably ten minutes, which 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 above, on March 12, 2020, Bitcoin experienced a "black swan" price crash. Between March 12 and 13, Bitcoin's price dropped 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 panic-stricken moments among investors, leading 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, providing partial liquidation functionality rather than a one-time liquidation. Through this mechanism, the system determines the margin ratio based on the calculated user exposure and automatically liquidates users' positions in phases until the margin ratio exceeds zero.

Huobi DM explained: "With the new mechanism, the system will automatically begin to gradually and phasedly liquidate users' positions. 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, a relevant person in charge of Huobi's contracts clarified on Twitter that this is not the same as the circuit breaker mechanism in traditional markets, as liquidation does 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 requires leading exchanges to work together to prevent a repeat of past mistakes.

But Binance's former CEO Changpeng Zhao also stated in March of the same year that "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 right 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" in its first test. What market effects will it bring? The subsequent developments are worth further attention.