Binance tested the pre-market trading "limit-up mechanism" for the first time. RED rose by up to 400% in the first three days after opening. Its applicability remains to be tested by the market.

Author: Weilin, PANews

On February 25, Binance announced that it would launch a "price limit mechanism" test in the pre-market trading of Launchpool, and this test was for RedStone (RED) tokens. RedStone (RED) is the 64th project of Binance Launchpool, a multi-chain oracle across EVM and non-EVM chains. In the pre-market trading rules, Binance stated that in order to promote innovation and enhance the user trading experience, it launched the "price limit mechanism" (Price Cap Mechanism). However, this mechanism was only tested at the time of the issuance of RED tokens, and it is still uncertain whether it will become a long-term function.

Huobi launched partial liquidation and circuit breaker mechanisms after the Bitcoin crash on March 12, 2020, but these measures were not widely adopted by exchanges. Former Binance CEO Changpeng Zhao also said at the time that it was unlikely to set up a circuit breaker mechanism (in the cryptocurrency market), as he believed that this could only be implemented in a completely monopolized market and could not be implemented in a free market. This time, many crypto users expressed different views on the new mechanism.

Binance tests pre-market trading limit mechanism, first testing the waters with RED tokens

According to the Binance announcement, users can start from 08:00 (Eastern Time) on February 26th, and put BNB, FDUSD and USDC into the RED reward pool on the Launchpool website to get RED. The activity will last for 2 days. Binance pre-market trading will list RedStone (RED) at 18:00 (Eastern Time) on February 28th, and open the RED/USDT trading market.

In order to drive innovation and improve the user's trading experience, Binance launched a new feature of the Binance pre-market trading market - the price limit mechanism. This mechanism will limit the maximum trading price in the first 72 hours of the pre-market market, and the token price increase must not exceed a certain percentage of the initial opening price. After 72 hours of the pre-market opening, there will be no price limit and trading will return to normal.

According to the tips, this price limit mechanism is only tested when the RED token is issued, and it is not yet certain whether this function will become a long-term function of the pre-market market in the future.

According to the pre-market trading rules, the maximum position limit for an individual is 5,000 RED. The specific daily limit rules are as follows:

2025-02-28 18:00 - 2025-03-01 17:59 (GMT+8): The maximum order price is 200% of the opening price

18:00, March 1, 2025 - 17:59, March 2, 2025 (GMT+8): The maximum order price is 300% of the opening price

2025-03-02 18:00 - 2025-03-03 17:59 (GMT+8): The maximum order price is 400% of the opening price

After 18:00 on March 3, 2025 (GMT+8): No price limit

In addition, RedStone (RED), total/maximum supply of tokens: 1 billion RED, total Launchpool supply: 40 million RED (4% of the maximum supply of tokens), initial circulation: 280 million RED (28.00% of the total supply of tokens).

The individual hourly reward hard cap is as follows:

BNB mining pool: 66,666 RED

FDUSD Pool: 8,333 RED

USDC mining pool: 8,333 RED.

The daily limit mechanism is designed to deal with the sharp rise and fall of new coins. Is it applicable to cryptocurrencies?

What Binance calls the "limit-up mechanism" can actually be regarded as a circuit breaker mechanism, but Binance has not yet clarified the time to stop trading. This mechanism originally came from the traditional financial market, and refers to the suspension of trading measures taken by the exchange to control risks when the volatility of the stock index 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 of the S&P 500 index from the closing price of the previous trading day - 7% (level 1), 13% (level 2) and 20% (level 3). When the first two thresholds are reached, trading will be suspended for 15 minutes. At the level 3 threshold, trading will be stopped.

Supporters believe that the circuit breaker mechanism helps stabilize market sentiment and prevent investors from overreacting. The daily limit mechanism tested by Binance this time is designed to prevent new coins from experiencing sharp rises and falls when they are listed, thereby reducing extreme volatility and avoiding price surges due to speculation or manipulation. This mechanism is designed to make pre-market transactions more controllable and predictable, and provide the market with enough time to digest information and avoid drastic fluctuations after the opening.

However, users who oppose this mechanism believe that it may violate the decentralized concept advocated by cryptocurrencies. The volatility of the crypto market is high, and the setting of circuit breakers is challenging in itself. Some users are considering whether a circuit breaker mechanism can be added to the algorithm and design of the currency. However, considering the free market fundamentalist attitude of the cryptocurrency industry as a whole, these ideas are probably not very realistic.

In addition, the crypto market is open 24 hours a day and there are multiple trading platforms. If a platform announces the implementation of a circuit breaker mechanism, it may lead to a widening of the price difference between different platforms, thus triggering arbitrage behavior. Crypto user @ChequerCat666 pointed out: "It is useless unless this coin is only listed on Binance, including DEX (decentralized exchange)." However, supportive users believe that it is possible to form an alliance mechanism similar to OPEC, the international oil price, to jointly design and operate the circuit breaker mechanism.

User MetaverseDrug@MetaverseDrug said that this time Binance’s new mechanism may deviate from its original intention: "The original intention may be to prevent the project from being a 'Christmas tree', but it appeared in this market situation. Well, there is no need to worry about short squeezes." Macroeconomics and encryption KOL Bai Ding@Geight16 believes that there are only circuit breakers for rising prices, but no circuit breakers for falling prices. Such a rule seems unreasonable.

At the same time, KOL DeFi Miner @DeFi8362 said on the X platform that the price limit mechanism is too long in effect: "It depends on how Binance sets the opening price. If it is set too low, the price will increase by 400% for three days and the price will be closed directly. If it is too high, this rule seems to be useless. I feel it will be the former. The first time I came into contact with the circuit breaker mechanism was when Huobi launched its new shares. However, the circuit breaker time is very short, probably ten minutes, and it still has some effect. It can reduce unnecessary fluctuations after the opening. It also allows retail investors to think about the price of coins relatively rationally. But three days is a bit too long."

After the March 12 Bitcoin crash, Huobi launched a circuit breaker mechanism. What was the effect?

As mentioned above, on March 12, 2020, the price of Bitcoin experienced a "black swan" price crash. Between March 12 and 13, the price of Bitcoin fell by more than 50%, and then rebounded. During this crash, BitMEX's liquidation exceeded $500 million in one hour. The platform also experienced downtime, which BitMEX attributed to a DDoS attack.

However, the suspension of trading during the outage by BitMEX was very similar to the "circuit breaker" mechanism of the stock market, especially the suspension of trading for dozens of minutes when investors were most panicked. This also caused many people in the industry to sigh, believing that BitMEX had played the role of a "circuit breaker" in the market to some extent.

Huobi DM (Huobi Derivatives Market), Huobi's cryptocurrency derivatives trading platform, subsequently announced the launch of a new liquidation mechanism that provides partial liquidation functions instead of one-time liquidation. Through this mechanism, the system will determine the margin ratio based on the calculated user exposure 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 gradually liquidate users’ positions in stages. The liquidation process also includes a circuit breaker function, which will stop liquidation when a large difference between the liquidation price and the market price is detected.”

However, the person in charge of Huobi Contracts also clarified on Twitter that this is different from the circuit breaker mechanism in the traditional market, and liquidation will not stop trading.

Tushar Jain, managing partner of cryptocurrency investment fund Multicoin Capital, said at the time that the circuit breaker mechanism seemed to be helpful to the cryptocurrency industry, and the price trend of the crypto market proved that the entire cryptocurrency industry needed to establish a circuit breaker mechanism. The crypto market structure collapsed, and leading exchanges needed to work together to prevent repeating the same mistakes.

But Zhao Changpeng, former CEO of Binance, also said in March of the same year that “the circuit breaker mechanism can only be used in completely monopolistic exchanges. Bitcoin trading is a free market and can be traded on several exchanges. This simply does not work… Don’t forget about decentralized exchanges, and who said 7% is the right number, why not 1% or 70%?”

Huobi’s circuit breaker mechanism was not widely adopted by crypto exchanges afterwards. This time, Binance will further explore this direction by testing the “price limit mechanism” for the first time. What kind of market effect will it bring? Subsequent developments are worth further attention.