How Does a ‘Circuit Breaker’ Mechanism Function in a Decentralized Exchange?
A circuit breaker in a decentralized exchange (DEX) is a protective mechanism that automatically pauses trading or limits price movement if the price of an asset changes too rapidly within a short period. This is designed to prevent catastrophic losses and protect the protocol from extreme market volatility, oracle manipulation, or flash-crash events.
Glossar
Decentralized Exchange
Architecture ⎊ A decentralized exchange (DEX) fundamentally diverges from traditional order book exchanges through its reliance on smart contracts and blockchain technology to facilitate peer-to-peer trading, eliminating the need for a central intermediary.
Circuit Breaker
Mechanism ⎊ Within cryptocurrency derivatives and options trading, a circuit breaker functions as a pre-programmed risk mitigation protocol, designed to temporarily halt trading activity when specified price thresholds are breached.