How Is the “Volatility Index” Used to Set the Thresholds for Circuit Breakers?

A volatility index (like the VIX in TradFi, or a crypto equivalent) measures the market's expectation of future price volatility. Exchanges can use this measure to dynamically set circuit breaker thresholds.

In periods of high implied volatility, the allowable price movement band is widened, and in low-volatility periods, it is narrowed. This ensures the circuit breaker is relevant to current market conditions, preventing unnecessary halts.