How far can PaperTrade's 1000x leverage experiment go, even if it means queuing to lose money?

Original | Odaily Planet Daily ( @OdailyChina )

Author | Asher ( @Asher_0210 )

On the evening of October 10, the synthetic perpetual contract platform PaperTrade based on HyperEVM officially launched. In less than 10 minutes, the platform's nominal trading volume reached $14.4 billion; within 24 hours of launch, the cumulative nominal trading volume exceeded $678 billion.

More talked about than the trading volume is the phenomenon of players "queuing to lose money." PaperTrade supports up to 1000x leverage, and after trading losses or liquidation, users can receive the native token PAPER. Therefore, some players have turned their purpose for entering the platform into "losing money to mine," and the initial trading frenzy has caused small transaction requests to be delayed, resulting in scenes where even losing money requires queuing.

Beyond the excitement, controversy has also followed: Why do small users have to wait longer? Can the profits of winners be paid out in time? Some have profited from the PaperTrade liquidity pool by pushing the price of Hyperliquid, raising questions about whether this is a mechanism flaw or a risk accepted by the team.

Below, Odaily Planet Daily will introduce the core mechanism of PaperTrade and outline the controversies that have arisen since its launch.

How does PaperTrade operate with 1000x leverage and loss mining?

Users trade directly with the protocol's shared USDC liquidity pool

PaperTrade was co-founded by Jez and Blurr and is built on the smart contract layer HyperEVM of Hyperliquid. Unlike trading platforms that match buyers and sellers through an order book, PaperTrade users trade directly with the protocol's shared USDC liquidity pool: when users lose, the funds enter the pool; when users profit, the pool pays out profits.

The platform reads the mid-price of the best buy and sell quotes from the Hyperliquid order book to price synthetic perpetual positions for BTC and ETH, but does not hedge positions on Hyperliquid. This eliminates traditional market slippage, spreads, and funding rates, with the risk of traders' profits borne by the protocol's liquidity pool.

1000x leverage means that a $100 margin can open a position with a nominal value of $100,000, where approximately a 0.1% adverse price change is enough to exhaust the initial margin. For players coming to "mine," a quick liquidation can just exchange for PAPER.

However, the platform has asymmetric yield reductions set on the profit side, especially targeting profits generated by very small price fluctuations. Therefore, "no traditional trading fees" does not mean that trading has no costs at all.

Winners queue for payouts, losers mine through liquidation

What makes PaperTrade unique is that LPs start with zero funds and accumulate payout funds through user losses and liquidations.

When users profit, if the pool balance is insufficient, the original margin can be reclaimed, and unpaid profits will queue in a first-come, first-served manner, waiting for subsequent funding. For example, if the pool has only $5 million but needs to pay $6 million in profits, the remaining $1 million must continue to wait. This allows the protocol to avoid raising capital from market makers in advance, but if subsequent traders do not lose enough, winners may not receive their full profits in time.

Losers will receive PAPER. The initial supply of PAPER is zero, with no pre-mining, and no allocation to teams or VCs; the only source of minting is trading losses or liquidations that meet the rules. When the LP balance is below $2 million, for every $1 lost, 100 PAPER will be minted according to the basic rules; after exceeding the threshold, the minting rate decreases according to a curve.

Users can stake PAPER to receive USDC earnings allocated by the protocol; after the LP exceeds the target balance of $5 million, excess earnings can also be distributed to stakers according to the rules. Thus, losers have the opportunity to recover costs through subsequent dividends.

However, in the early stages of PAPER's launch, it cannot be freely transferred, and there is no public market price. The lost USDC is certain, and whether the PAPER received can cover the costs still depends on subsequent platform dividends and market pricing.

Public rules, no pre-allocation, but still controversial

One important reason for PaperTrade's explosive popularity at launch is that it offers a participation method different from conventional token projects. Without pre-allocation for teams and VCs, tokens are issued from scratch, and participants bear costs through trading and then share protocol earnings. For some crypto-native users, this clear rule and aggressive gameplay experiment is inherently attractive.

However, public rules can only help participants understand risks; they cannot guarantee that these risks are within a controllable range. The controversies after launch mainly focus on execution fairness and pricing security.

Fair launch, but small users wait longer

Early losses can yield more PAPER, so users naturally hope to transact as soon as possible. However, at the beginning of the launch, a large number of requests flooded in, and transactions were not executed simultaneously, forcing small users to face longer wait times.

According to PaperTrade's response, to avoid front-end congestion and garbage request attacks, small orders do not enjoy the same priority as large orders, and the team has tried to improve fairness as much as possible under performance constraints.

For players, no pre-allocation is just part of a fair launch. Who can transact first and obtain PAPER also affects the final distribution. If large orders are easier to execute, small users may miss more favorable participation points.

Relying on Hyperliquid quotes, PaperTrade faces price manipulation

A more direct controversy arises from PaperTrade's reliance on the mid-price of Hyperliquid BBO. Trader Rune pointed out that PaperTrade's documentation has disclosed the risk of price manipulation using Hyperliquid's best buy and sell quotes. Community user boblob claimed that two wallets appeared to establish large positions in PaperTrade while executing trades of about $20 million, causing the ETH price on Hyperliquid to briefly fluctuate by about 10 to 20 basis points.

The logic behind such behavior is: if the cost of pushing external quotes for traders is lower than the profits obtained from their large PaperTrade positions, they may profit from the protocol's liquidity pool. The maximum 1000x leverage and large position limits mean that even small price changes can correspond to considerable gains or losses.

In response, PaperTrade stated that the risk of manipulation is not a design oversight but rather an issue arising from opening higher unliquidated position limits to alleviate queuing pressure at the initial launch. As traffic decreases, the team has begun tightening on-chain and relay-level position limits to reduce the space for manipulation profits.

The official also stated that some users who continuously attempted manipulation ultimately returned most of their profits to the platform. However, this claim cannot replace independent verification of cash flows.

After the frenzy, how many players can PaperTrade retain?

After the initial frenzy, PaperTrade's position size has significantly decreased. As of 10 PM last night, the platform's unliquidated positions were approximately $1.3 billion, down about 60% from 12 hours ago; the margin corresponding to positions dropped from $20.29 million to $14.34 million, a decrease of about 30%.

"Losing money to mine" attracted the first batch of players but may not continuously attract new users. As the PAPER minting rate decreases, the same $100 loss will yield fewer tokens for later participants. When PAPER opens for trading, the cost comparison between directly buying tokens and losing money to mine will also affect users' choices.

The excitement of this "losing money to mine" is underpinned by the market's expectations for PAPER's valuation and platform dividends. Whether PaperTrade can maintain its popularity and turn this expectation into actual returns is key to retaining players. After all, players are willing to lose some money for expectations but will not keep paying for expectations.

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