In layman’s terms, the dual-price mechanism is a measure used by cryptocurrency exchange platforms to mitigate any potential liquidations as a result of uncontrollable drastic price fluctuations caused by market manipulations.
How does the Dual-Price mechanism work?
Much like forex or the stock market, the price and values of cryptocurrencies are susceptible to various market fluctuations. However, unlike the stock market, the cryptocurrency market is operating 24/7 in a more decentralized manner. As a result, cryptocurrency trading platforms run the risk of experiencing malicious attacks or conducive market manipulations at any point in time, especially when the market depth is poor, which could result in significant price deviations between one platform to another.
For example, let’s invision that BTC is traded at $9,000 across platforms. Due to malicious market manipulations, the price plunges from $9,000 to $8,200 on Platform A, then recovers to $9,000 within a matter of seconds. If the market price is used as the fair reference price, both long and short positions with high leverage may be liquidated.
On the other hand, if the price effectively reflects the overall market conditions rather than the exchange’s trade price in that moment, it negates any form of exploitation and unnecessary liquidation, making the proposition considerably safer as an option for traders.
The principle concept of the dual-price mechanism is to use a fair price instead of last traded price to trigger liquidation. The fair price is essentially an external price derived from the average spot price. We call this fair price the “mark price”. In other words, as long as the mark price doesn’t reach the liquidation level, the position won’t get liquidated.
The dual-price refers to the last traded price and the mark price.
Last traded price is literally the last traded price on Bybit. It is usually close to the spot index price as anchored by the funding mechanism, while it may deviate significantly in high volatility or when attacked by manipulators.
Mark price of Bybit perpetual contract is derived from the spot index price and a decaying funding rate. The index price of BTCUSD is the real-time weighted average price of five major spot exchanges (Coinbase, Bitstamp, Kraken, Gemini, Bittrex), and the index price of BTCUSDT is the real-time weighted average price of four major spot exchanges (Poloniex, OkEx, Huobi, Binance).
Suppose Ann enters a 10,000 BTCUSD long position at $9,184 with 10x leverage. The initial margin is 0.1088BTC, and maintenance margin is 0.0054BTC. Unexpectedly, the platform experiences some form of manipulation and the transaction price dips to $8,000 within a matter of minutes.
Based on the last traded price of $8,000, the current unrealized loss is 0.1611BTC, and the position margin is -0.052 BTC, which is significantly under the maintenance margin level.
However, the mark price follows spot index price which means that it will remain at around $9,184 instead. Based on the mark price, the current loss is 0.01 BTC, and the position margin is 0.0988 BTC, which is still above the maintenance margin requirement. Thus the position will not be liquidated.
As per the example above, it’s clear to see that the dual-price mechanism protects traders’ positions from unnecessary liquidation in the event of abnormal price fluctuations. This in turn makes it easier, safer and for traders to make more informed decisions when trading.