Dual-Price Mechanism Definition, Example & Uses
Bybit is a cryptocurrency derivatives exchange aiming to revolutionize today’s cryptocurrency market by combining the best of cryptocurrencies and traditional finance to bring about the industry’s safest, most reliable, fairest, and most user-friendly exchange to date.
The following article introduces Bybit’s Dual-Price mechanism and how Bybit uses the Dual-Price mechanism to prevent traders from falling victim to Market Manipulations, and to ensure a fair trading environment for all our traders. But why are the cryptocurrency markets so susceptible to market manipulations? And how is the dual-price mechanism so crucial in solving this problem?
The cryptocurrency market is often volatile and suffers from periods of limited liquidity. These factors, combined with the anonymity of market participants, can lead to unethical market manipulations, such as pump & dump schemes, occurring regularly on exchanges. Groups of people may take coordinated actions to manipulate the price. While this would traditionally be considered a criminal activity, the lack of regulations in the crypto market makes the cost of market manipulations very low.
Let’s take a look at a real-life example.
Due to market manipulations, the market price on a famous futures exchange deviated significantly from the spot price; this resulted in a mass liquidation of traders’ positions. In addition to costing traders large amounts of money, market manipulations also destroy the general public’s confidence in the entire crypto exchange industry.
Bybit’s top priority is to provide a fair trading environment to all traders, which is why we employ a “Dual price mechanism” to prevent market manipulations.
So what is the “Dual Price mechanism”?
It consists of 1) the Mark Price and 2) the Last Traded Price.
For perpetual contracts, the Mark Price refers to a global spot price index as well as a decaying funding basis rate. To make it clearer, it is a number that reflects the real-time spot price on the major exchanges. Bybit uses the Mark Price as a trigger for liquidation and to measure unrealized profit and loss, but this does not affect your actual profit & loss. Only when the Mark price does reach your liquidation price, is your position liquidated.
And what about the Last Traded Price? Well, the Last Traded Price is Bybit’s current market price, and it is always anchored to the Spot Price using the “Funding” mechanism. This is why the price on Bybit is unlikely to significantly deviate from the spot market price.
How does the Dual Price mechanism protect traders?
“Liquidation will only be triggered when the Mark Price hits the Liquidation Price”. Therefore, any abnormal price movement that may occur on Bybit’s internal market will not cause liquidation. As the Mark Price is almost impossible to manipulate, this mechanism is useful to keep the so-called “Whales” and other kinds of market manipulators from affecting Bybit’s prices.
Let’s take a look at the previously mentioned real-life example.
The last traded price of Bitcoin on an exchange plummeted to USD 4,800 while the spot price was still around USD 7000. As a result, most of the leveraged traders with long positions were maliciously liquidated.
If this had happened on Bybit, the “Dual Price Mechanism” would have prevented this from happening. Liquidation would not have been triggered as the Mark Price would have stayed around USD 7000.
Additionally, the price difference between various exchanges would create risk-free opportunities for arbitrageurs; making the last traded price go back to normal within a short period of time.
In conclusion, traders with long positions would not be affected as they would not be liquidated and the price would quickly go back to normal.
Reminder for traders
In a highly fluctuating market, the Last Traded Price on Bybit may temporarily deviate from the Mark price. This may cause significant unrealized profit or loss immediately after an order has been executed. Please note that this does not imply an actual profit or loss, and be sure to keep an eye on the distance between the Liquidation Price and the Mark Price to prevent an, otherwise avoidable, liquidation.
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