TechFlow Editorial: On Monday, the team behind this perpetual contract exchange, which offers up to 1000x ultra-high leverage in the Hyperliquid ecosystem, made it clear that there are no plans in the short term to allow PAPER to exit its staking contracts: “At this stage, we have no plans to allow free transfer and circulation of tokens outside the contract.”

This marks a complete reversal from the roadmap initially promised to the community. Earlier this month, when we previewed the launch of Papertrade, official planning clearly stated that PAPER would eventually be allowed for free transfer; and in an official announcement on October 1, the team firmly declared that the token transfer feature would be officially activated “after sufficient time has passed.”

Now, this activation plan has been indefinitely shelved for the foreseeable future. Hit directly by this development, several trading platforms such as Aster and Paragon, which had previously rushed to list PAPER pre-market perpetual contracts, have urgently delisted them. Understandably, those airdrop farmers who deliberately lost real money in trades to “farm tokens” earlier are now furious.

However, no matter how strongly the community reacts negatively to this “breach of promise,” the underlying economic logic behind the team’s decision ruthlessly reveals the most fatal native flaw of these emerging “House Pool” exchanges: when a token essentially serves as a claim on ownership of the casino, shorting that token is equivalent to betting on the casino’s bankruptcy; and the huge profits from this external shorting can directly fund a malicious attack designed to drain the casino.

A Difficult Choice: From Promising Circulability to Indefinite Lockdown

For readers unfamiliar with this mechanism, let’s quickly review the background: on the Papertrade platform, the exchange itself acts as the counterparty to all users through a unified, shared USDC pool, whose funding source relies entirely on traders’ actual liquidations and losses.

When you lose money in a trade, the system mints a corresponding amount of PAPER tokens for you; and by staking these PAPER tokens, you can receive a pro-rata share of the protocol’s collected USDC fees, as well as the abundant profits that spill over once the pool exceeds its size cap. As we analyzed back in May: here, losing gamblers gradually become new shareholders of the casino.

However, the technical adjustments announced this Monday completely rewrote the rules of the game:

• Locking Token Circulation: PAPER can still be freely staked and unstaked, but absolutely cannot be sent to other external wallet addresses, nor freely sold off on secondary markets, and the team currently has no plans to lift the restrictions;

• Dilution and Sharp Reduction in Incentives: Under the future mechanism, for every $1 million loss incurred by traders, only approximately 0.1% of PAPER’s total supply at that time will be minted, tilting new token issuance toward new users and continuously diluting early holders’ shares. Meanwhile, loss incentives have shrunk drastically: when the platform first launched, users could earn up to 100 PAPER tokens for every $1 lost; now that number has plummeted to around 10. The only exception occurs during critical moments when the pool nears depletion: the system triggers additional reward mechanisms to attract more losing trades into the market to bail it out. The team vividly describes this mechanism as “the casino auctioning off its future cash flow at a discount.”

These key parameter modifications have been submitted to the timelock queue and will go live 24 hours after completing final security audit verification. So why did the team make such a drastic move at this critical juncture?

The trigger was precisely the external derivatives market mentioned earlier. Platform Paragon rushed to list PAPER perpetual contracts just 8 days after Papertrade’s initial launch, on October 18, followed closely by Aster on Monday morning. As co-founder Jez later admitted, “I severely underestimated the external market’s frenzied demand for pre-market perpetual contracts.”

Tradable Tokens Turn Into Lethal Attack Weapons

PAPER’s revenue comes entirely from the casino’s actual take, so its intrinsic value is tightly bound to the health of the underlying pool. If someone drains the liquidity pool or causes winning traders to get stuck in the withdrawal queue (i.e., unpaid profits queuing up while waiting for new losing funds to cover them), PAPER’s market valuation will instantly drop to zero.

This is where the most fatal security vulnerability lies. Papertrade’s matching mechanism directly anchors to Hyperliquid’s mid-price (the median between the highest bid and lowest ask). This means that if an attacker can push up or crash quotes on Hyperliquid within an extremely short timeframe, they can simultaneously shake Papertrade’s settlement benchmark.

A real warning occurred on the night the platform launched: according to The Block, a mysterious wallet merely nudged Ethereum’s price slightly upward by about 0.12% on Hyperliquid, then pocketed approximately $1.28 million in net profit and exited on Papertrade. Although Papertrade officials later stated that the trader subsequently lost most of those profits through other new accounts, the extreme danger of this attack vector has been laid bare.

The team has been quite candid about this vulnerability. In a technical note released on October 11, they frankly wrote: “Price manipulation attacks are technically always feasible; the only question is whether launching such an attack makes economic sense.”

Under normal conditions, the default way to prevent attacks is to ensure the attacker finds no positive mathematical expectation. The core defense lies in strictly capping the total size of the house pool: the smaller the pot, the lower the maximum amount an attacker can plunder. However, once external exchanges list freely tradable and shortable PAPER contracts, the entire game-theory mathematical model is completely overturned.

Let’s look at the team’s own calculations: assume the pool’s current base capital is $10 million. To manipulate BTC or ETH prices in the spot or main market to completely drain this $10 million pool, an attacker would need to absorb roughly $15 million in liquidity slippage and trading friction. Under a single-legged play, this attack is obviously unprofitable, summarized by the team in one sentence: “purely spending your own money to run a loss-making business.”

But suppose this attacker, while executing the manipulation, simultaneously opens a $10 million PAPER perpetual short position on an external exchange. At that moment, when he successfully drains the internal pool and triggers a solvency crisis, PAPER’s valuation instantly collapses; the massive profits harvested from his external short position not only completely cover the $15 million cost of market manipulation, but also yield substantial net profit. In an instant, what was originally a loss-inducing suicide mission transforms into a “highly economically viable” risk-free ATM.

In the words of Papertrade’s official statements, once a token can be freely shorted externally, perpetual contracts targeting that token are directly mutated into “leveraged shorting poison pills aimed at the house’s solvency.”

More problematically, these lethal shorting derivatives are scattered across various exchanges controlled by third parties, giving Papertrade absolutely no power to intervene. It can cap its own pool limits, but cannot stop Paragon, Aster, or any other platform from independently listing PAPER contracts. The platform’s only passive defense is left to severely compress its maximum single-position size limit. This means that for every new PAPER trading pair added externally, Papertrade’s own business ceiling gets dragged down a notch.

When backed to the brink, facing a life-or-death choice between “having a freely circulating token” or “having an exchange capable of healthy expansion,” the team unhesitatingly chose to save the exchange itself.

Ironically, this fatal blind spot was completely overlooked even in the most authoritative stress test before the project went live. Back in August, security firm Sumcap fed nearly 3.6 million real historical trades from Hyperliquid into Papertrade’s underlying architecture, comprehensively replaying them across more than 600 rigorous extreme scenarios. The results showed that the pool maintained 100% solvency under all tested conditions. However, the model carried a fatal prerequisite assumption: it completely excluded PAPER’s external secondary market price from the simulation, whereas the true lethal threat lurks precisely in that external price.

Analyzing the Status Quo: Holders' Rights and Yield Collapse

So, what exactly do current PAPER holders hold in their hands? Simply put, you possess a voucher that allows continuous receipt of the protocol’s USDC profit dividends, but this voucher itself can never be liquidated on secondary markets. As co-founder Jez explained, “You’re best off understanding PAPER as an internal profit-sharing right (Revenue Share) within the exchange, rather than a traditional cryptocurrency token.”

Undeniably, since its official launch on October 10, Papertrade’s cumulative dividend amounts have indeed been impressive. Data monitored by DefiLlama shows that to date, the protocol has distributed approximately $58 million in real USDC dividends to PAPER holders. However, this cash flow surge has recently cooled off precipitously: daily dividends dropped from a peak of around $6.7 million on October 15 to a daily average of about $1.5 million between October 17 and 19.

Meanwhile, the economic ledger for newly entering losers is becoming increasingly brutal.

Based on recent dividend levels of approximately $0.00017 per token daily, the 10 PAPER tokens exchanged for every $1 lost by a trader yield only a meager $0.002 in daily dividends. This means users must wait nearly 600 days (about 1.6 years) to barely break even on their lost $1 principal solely through dividends. In reality, even the earliest entrants—the largest early-volume-farming whales—have mostly failed to recoup their costs yet. Monitoring by on-chain analytics firm Lookonchain indicates that among the top 25 largest losers network-wide, a full 21 still show a net negative account balance even after factoring in staking dividends.

Furthermore, the final pricing offered by the secondary market for PAPER before delisting clearly confirms the collapse of market confidence. Platform Paragon set its settlement price at $0.026 when liquidating its perpetual contracts, corresponding to a total supply of roughly 8.85 billion PAPER tokens at the time, yielding an implied valuation of only about $230 million. If the recent daily dividend rhythm of $1.5 million could miraculously persist for a full year, stakers would cumulatively collect about $560 million, more than double that valuation. Such a massive valuation discount clearly signals that market traders fundamentally do not believe such high-intensity dividends can sustain long-term.

The Papertrade team fully understands this stark reality. In Monday’s announcement, the official stance framed this underlying architectural restructuring as returning PAPER to its roots: “Aligning it more closely with its original design intent: serving as a transaction volume rebate (Rakeback) for the exchange—that is, returning part of the house’s taken profits back to the genuine players who inject fuel into the casino.”

In other words, PAPER is rapidly shedding its characteristics as an investment-grade financial asset, evolving into a “loss reimbursement voucher” redeemed at an extremely slow pace in installments.

Soul-Searching Questions: Who Will Continue to Act as Loss Fuel?

• Who would willingly continue to lose money?: Every cent flowing to stakers has only one source: traders’ liquidation losses. Previously, many farmers dared to deliberately lose money under 1000x leverage purely because they bet on PAPER eventually being freely circulateable and cashing out at high prices on secondary markets. Now that the liquidity escape route has been completely cut off, volume-farming mining has turned into a grueling ordeal lasting 600 days with yields that could degrade at any time. Once this wave of speculative volume-farmers fully withdraws, the protocol will be left counting only on native retail gamblers who voluntarily participate in the game purely for the extreme thrill of 1000x leverage. This is Papertrade’s most authentic business foundation, and we are about to see exactly how large this base truly is.

• Can external shorting forces really be completely eliminated?: To some extent, it can indeed achieve a blocking effect. Paragon’s pre-market perpetual contracts operate entirely on the expectation that the token will eventually have a spot price and undergo basis convergence; once the spot anchor disappears, derivatives become water without a source, forcing exchanges to proactively close the market. However, hidden “side doors” remain. For example, PaperDAO traded on Uniswap (token symbol PULP) is essentially a decentralized vault holding substantial PAPER staking positions; although its whitepaper claims redemption is only possible “after Papertrade opens transfers,” the emergence of such tokenized wrapped vouchers proves that external capital’s impulse to seek short exposure can never be completely sealed shut.

• Can betting-style exchanges have freely circulating native tokens?: For comparison, Jupiter’s ultra-high leverage product YOLO, launched on October 15, uses the exact same house-betting algorithm, but they brilliantly abandoned native tokens from day one. YOLO’s house pool is directly funded by losers’ capital and is physically isolated from Jupiter’s core JLP pool, leaving no target in the market that can be shorted. In contrast, similar competitor Cardboard in the Solana ecosystem, which also offers 1000x leverage, took a path identical to Papertrade: for every $1 users lose, 100 CARDBOARD tokens are minted, and the token is similarly strictly restricted from transfer. Data from Pine Analytics shows that between October 15 and 19, Cardboard recorded open interest nominal principal of up to $4.48 billion, a significant proportion of which consists of suspected hedging farming wash-trade transactions. With the Papertrade case leading the way, Cardboard’s farmers are forced to reassess the massive risks of their locked tokens.

• Is this lockdown permanent?: The phrasing “at this stage” in the announcement obviously leaves room for future variables. Papertrade acknowledges that the security of its system is entirely dependent on the depth of Hyperliquid’s price feeds, and they are betting that liquidity on Hyperliquid’s underlying order book will expand exponentially. Because the deeper the depth, the higher the cost to manipulate spot prices; only when manipulation costs become so high that external short profits can never cover them does theoretically restoring PAPER to free circulation become safe. Additionally, introducing a delayed oracle feed mechanism like YOLO’s is another effective path to avoid real-time spike manipulation. But until these prerequisites are fully mature, PAPER will likely remain tightly locked within staking contracts.

Macro Perspective: Common Exam Questions for Betting-Style Exchange Tracks

Without a doubt, Papertrade’s emergency pivot has cost the team enormous reputation and community trust. Those early believers who absorbed losses to chase liquidity premiums are now forced to accept an unliquidatable, continually diluted ultra-long-term cash flow, which starkly contradicts the psychological contract they initially signed.

However, from a purely systemic architecture and financial engineering perspective, I believe the team made a completely defensible, and arguably correct, decision to save the platform from sudden collapse. The ultimate duty of a pool is to pay out profits to compliant winning traders on schedule; if the existence of a native token instead gives attackers a risk-free arbitrage model to plunder the pool via shorting, then not only will stakers lose everything, but all normal users participating in trading on the platform will be placed at immense risk of a systemic solvency crisis.

The implications of this incident for the entire on-chain derivatives sector are profound: in all decentralized exchanges adopting a “house-betting pool” architecture, the token itself represents the casino’s total net assets; allowing the casino’s equity to be freely shorted without barriers or high leverage in external financial markets is tantamount to directly gifting a hedging tool to malicious predators. It is foreseeable that any future project attempting to replicate this model must confront this insurmountable institutional chasm.

In this game of wagers, the iron rule that “the house always wins” still holds, but Papertrade’s self-rescue also proves that collapsing the house in a decentralized jungle is far more complex than ordinary people imagine. This epic struggle revolving around liquidity, tokenization, and attack costs is destined to see even more dramatic chapters unfold.

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