Papertrade, a new perpetuals trading platform in the Hyperliquid ecosystem, officially started trading on Oct. 10. The protocol quickly drew attention across crypto circles by offering up to 1,000x leverage, zero slippage on the order book, no traditional funding rate, and a design in which traders can receive tokens when they close at a loss.
Papertrade shows $136 million in total value locked, more than $28.1 billion in cumulative trading volume, and 11,473 accounts.
At the same time, the structure has raised questions about whether the protocol’s economic model can remain sustainable. X user Ray said Papertrade does not create real perpetual positions on Hyperliquid. Instead, the protocol liquidity pool, or LP, takes the full counterparty risk for traders. In Ray’s view, major economic data releases or sharp price gaps could let arbitrageurs use 1,000x leverage and two-sided hedging strategies in ways that leave the LP with losses beyond what it expected.
How Papertrade works
According to Papertrade’s official documentation, the project is a synthetic perpetuals trading protocol built on HyperEVM in the Hyperliquid ecosystem. At launch, it supports BTC and ETH, with leverage of up to 1,000x.
Its setup differs from the order-book model used by platforms such as Hyperliquid and Binance. Traders are not matched against one another. When a user opens a position, the smart contract reads the midpoint of Hyperliquid’s Best Bid and Offer, or BBO, and uses that as the entry price. When the user closes the trade, the contract reads the price again, calculates profit or loss, and settles directly against the protocol LP.
In practice, a trader may appear to be going long or short BTC, but the trade is actually a synthetic transaction against Papertrade’s liquidity pool. Because the protocol does not need to execute on a live order book, it can offer zero order-book slippage and no traditional funding rate.
That does not mean profitable positions receive the full notional gain without limits. Winning trades are still subject to an Impact Haircut and related fees.
PAPER issuance is tied to trader losses
Another unusual part of the design is that trader losses are directly linked to the issuance of the PAPER token. Traditional exchanges usually earn revenue through trading fees, while market makers take on the risk of supplying liquidity. Papertrade takes a different route: its LP starts from zero, and its capital mainly comes from traders’ realized losses.
When a user closes a losing position or is liquidated, the system mints PAPER based on the amount of eligible loss. During the early stage, when LP liquidity is below $2 million, each $1 of eligible loss can mint as many as 100 PAPER. Once liquidity rises above that threshold, the minting ratio gradually declines.
PAPER holders can stake the token to share protocol revenue. After LP funds exceed $5 million, the amount above that cap can also be distributed to stakers under the mechanism described by the protocol.
The token does not represent a direct redemption claim on LP reserve assets at a fixed ratio. Its economic value depends on future protocol revenue and the protocol’s ability to distribute that revenue. General transfers of the token are also not open in the initial stage.
This creates a distinct loop. Traders who lose provide capital to the LP, while those same losing traders receive PAPER and gain a chance to participate in future revenue distribution. The open question is what happens if trader profits exceed the liquidity available in the pool.
Papertrade’s answer is a first-in, first-out payout queue. Profitable positions that cannot be paid immediately must wait for future liquidity to enter the system. The protocol can keep operating under that setup, but it does not guarantee that winning traders can withdraw all profits right away.
Why critics focus on 1,000x leverage
Ray argued that the protocol may face a structural arbitrage problem. The issue, in that framing, is not simply whether a trader guesses market direction correctly. It is the combination of very high leverage, isolated margin with capped downside, and settlement differences when the market gaps between valid price reads.
Ray gave an example using two accounts. A trader deposits $1,000 of margin into each account and opens a 1,000x BTC long in one account and a 1,000x BTC short in the other. Each position has a notional value of $1 million. If BTC jumps 0.5% between two valid price reads, the long could theoretically generate $5,000 in gross profit. The short, after liquidation, would lose only the $1,000 isolated margin under that assumption. Across the two trades, the setup could produce about $4,000 in theoretical profit.
Ray compared that structure to a synthetic straddle built through long and short positions, designed to profit from sharp volatility rather than a single directional call. In that scenario, if the market gaps between oracle price reads, the losing side may be capped at the $1,000 margin, while the winning side is calculated on the larger move.
Concerns over LP solvency and a negative spiral
Another X user, Yankee, said he agreed with Ray’s risk analysis. He added that he had studied similar gap strategies in Ostium’s silver and copper markets. In his description, high leverage combined with simultaneous long and short positions effectively simulates a long-volatility trade. If the market does not move enough, the trader loses a relatively limited cost. If a sharp gap hits, the profitable side may capture outsized gains.
For Papertrade, the core issue is that the LP must fund trader profits, while the protocol does not have a traditionally pre-funded liquidity pool. If extreme market conditions cause many traders to profit at once, the LP could run short of liquidity and force some winning positions into the payout queue.
Ray said this could turn into a negative loop: LP funds keep getting drained, profitable traders wait longer to be paid, ordinary traders gradually leave, new trading losses decline, the LP has a harder time restoring solvency, and PAPER stakers who depend on protocol revenue are also affected.
Because PAPER itself does not have an independent asset reserve backing a fixed redemption value, a prolonged loss of confidence in the protocol’s future revenue could also weigh heavily on the token’s economic value.