Papertrade Launches with High Leverage, Zero Liquidity, and Immediate Scrutiny
Papertrade, a new decentralized exchange (DEX) that launched on October 10th, has immediately drawn attention for its high-leverage trading, a novel approach to liquidity, and significant risks highlighted even before its debut. The protocol operates as the counterparty to all trades, meaning it directly assumes the risk of winning traders’ payouts. If a winner’s profits cannot be covered by losers’ funds, they are placed in a queue to be paid later. MONI Research had previously identified the price oracle and the queuing system for payouts as major risks, and on its first day of operation, accusations of price manipulation on Hyperliquid to exploit Papertrade’s pricing emerged.
Opening Day Performance: A Tale of Two Extremes
The launch day for Papertrade presented a starkly divided picture. At 10 AM EST on October 10th, the pre-deposit phase saw 11,465 addresses deposit approximately $138 million. Within 24 hours, the nominal trading volume reached an astonishing $596.28 billion. However, the protocol’s internal statistics revealed that traders incurred a net realized loss of approximately $30.24 million. TradingBeats data indicated that 14,158 positions were liquidated, resulting in a loss of approximately $23.116 million in isolated margin.
Price Manipulation Allegations Surface on Day One
Just eight hours after the platform went live, a user on X, @Dr_bobo54, posted allegations that someone was manipulating Hyperliquid’s price feed to open multi-billion dollar long positions on Papertrade for arbitrage. This concern was not unexpected, as MONI Research analyst HONKAYO had identified the price source as the primary risk in a pre-launch analysis on October 2nd.
Papertrade operates without a traditional liquidity provider (LP). Instead, the protocol itself acts as the counterparty for all positions, with the losses of one set of traders funding the profits of another. This analysis juxtaposes HONKAYO’s pre-launch assessment with the events of the first trading day.
Protocol Mechanics: A Casino-Like Model
HONKAYO’s analysis pointed out that Papertrade uses the midpoint of the best bid and ask prices from Hyperliquid as its reference price. The protocol does not hedge its positions on Hyperliquid; rather, it records the trades and settles profits and losses using its own cash pool, making its economic nature more akin to a casino.
Initially, Papertrade only supports BTC and ETH markets, employing isolated margin and a zero funding rate system. Founder Blurr explained in an interview that even major assets are difficult to manage with 1000x leverage, and more volatile cryptocurrencies would lead the protocol to lose more than it collects.
The absence of a local order book means all trades are executed at the midpoint of the bid and ask prices, which is marketed as “zero slippage.” However, HONKAYO cautioned that winning trades are subject to a “payment curve” before funds are credited. Small price fluctuations result in a heavier discount, meaning an initial profit of $1,000 might only yield $600. Blurr admitted that this calculation method is largely adapted from Rollbit. The protocol charges a fee of 1% of the profit or loss, according to Blurr.
Therefore, “zero slippage” refers to the entry and exit prices, not the final amount credited to the user.
The Queuing System: A Debt of Future Losses
HONKAYO illustrated the queuing system with an empty pool scenario: if a trader deposits $100 and profits $100, the protocol can return the initial margin but lacks the additional $100. This profit then becomes a queued debt.
If the next loser incurs a $40 loss, this amount is paid to the winning trader, leaving a remaining debt of $60. Only when another trader loses $60 is the debt fully cleared. Subsequent winners then join the queue. Blurr provided a larger example: if a pool has $5 million and a trader wins $6 million, they receive the $5 million from the pool, with the remaining $1 million pending future losses.
The risk lies in the waiting period. If traders leave due to prolonged queues, the funds needed to cover debts may disappear. The team views the queuing system as an early safety net, ideally used minimally. The risk disclosures, however, permit the cash pool to go negative. Blurr’s explanation can be cross-referenced with an interview video.
PAPER Tokenomics and Inflationary Concerns
PAPER, the native token, has an initial supply of zero. The team claims there is no pre-mining or allocation for the team or venture capitalists; tokens are minted when users realize losses or are liquidated. When the protocol’s tracked cash falls below $2 million, 100 PAPER tokens are minted for every $1 lost. Above this threshold, the minting curve tightens. HONKAYO calculated a tiered system: approximately 50 tokens per dollar when the LP cumulative earnings reach a high of $50 million, 10 tokens at $260 million, and 1 token at $1.08 billion. The 12 billion token cap is not absolute; if the LP cash falls below $2 million again, the rate reverts to 100 tokens per dollar, creating a path for unlimited inflation.
PAPER can be staked immediately, with stakers receiving a majority of protocol fees and any cash exceeding target balances. However, initial transfers are restricted, and there is no market price.
This mechanism could incentivize users to intentionally incur losses to farm tokens. HONKAYO expressed concern that once the emission rate decreases, trading volume driven by bots could evaporate. His simulations indicated that PAPER at 100x leverage has the lowest cost, at approximately $2.55 per 1,000 tokens, while 1000x leverage costs $5.06, suggesting that the highest leverage is not always the cheapest way to farm tokens.
Price Manipulation: The Core Risk
The primary risk stems from Papertrade directly reading Hyperliquid’s public price quotes. HONKAYO pointed out that attackers can manipulate the best bid and ask prices to execute trades on Papertrade at distorted rates, then wait for the market to correct. This strategy becomes profitable when the pool’s funds exceed the cost of price manipulation. The team has implemented a $5 million cash cap to mitigate this, hoping the pool remains below the cost of manipulating the BTC or ETH order books, but this assumption has not been independently tested.
First Day Exploitation Allegations
The risks were immediately apparent on the first day. On October 10th, @Dr_bobo54 posted that two wallets were manipulating Hyperliquid’s ETH price by 10 to 20 basis points using approximately $20 million per trade, while simultaneously opening nine-figure long positions on Papertrade.
Paper trade @papertrade_xyz getting actively exploited by two wallets moving ETH 10-20bps on hyperliquid using $20m clips or so and trading 9 fig longs on paper.
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Glaring issue with the protocol as is, needs to be fixed ASAP for any chance at sustainability pic.twitter.com/KHXjp9qF5s
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— Boblob (@Dr_bobo54) October 10, 2026
Trader Rune retweeted this, noting that the official explanation itself revealed this risk. On-chain monitoring also showed an address that, approximately eight hours after launch, had a net profit of about $1.28 million. This address then opened 30 short positions at $2,507.35, totaling approximately $297 million in nominal value, and sold about 6,600 ETH on Hyperliquid, pushing the price down to $2,504.40. However, the positions were not closed, ETH rebounded to $2,509.95, and all short positions were liquidated, resulting in a loss of approximately $450,000.
The community speculated that the team blocked the liquidation. Some analyses suggested using official oracle prices aggregated from multiple exchanges on Hyperliquid instead. However, these are currently unconfirmed allegations, monitoring, and speculation, and the team has not issued a public response as of this report.
Simulation Limitations and Centralized Operations
HONKAYO also reviewed an independent simulation that analyzed approximately 3.6 million historical high-leverage trades on Hyperliquid across 608 scenarios. All scenarios maintained solvency, with the worst-case queued debt at around $61,974. However, the weakest scenario assumed only 25% of selected activity flowed in and excluded price manipulation and relay delays, leading HONKAYO to conclude it was only suitable for testing assumptions and insufficient to guarantee deposits.
Early operational aspects also leaned towards centralization. Trades were initially routed through the official website and the project’s proprietary relayers. Liquidations took precedence over position closures, and new positions were prioritized last. The team retained the authority to halt new positions and close markets in emergencies.
papertrade launch details
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papertrade is a fair launched smart contract exchange built on the hyperevm blockchain. as a fully onchain protocol, papertrade has significant advantages – decentralization, reliability, composability, transparency. it also has the usual onchain…
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— papertrade.xyz (@papertrade_xyz) October 1, 2026
As of MONI’s deadline, the official contract address and verified source code had not been published. The audit report from Guardian Audits, hired by the team, was also not yet available in their repository. It remains unverified whether these will be provided post-launch.
Team and Origins
The Papertrade team was initiated by Jez and Blurr. Jez is identified as Colin Hong, whose resume includes MIT, Morgan Stanley, and a Venture Partner role at Standard Crypto. However, HONKAYO cautioned that this does not imply an investment by the fund in Papertrade. Blurr remains anonymous, stating the project was built by only two to three individuals, and funding details have not been disclosed. The concept originates from a paper on queuing mechanisms and the Martingaler whitepaper from the summer of 2024.
Introducing @papertradexyz – a fair-launched, fully-onchain perpetuals exchange built on Hyperliquid by @izebeleth & @blurr
-1000x leverage -0 slippage -No funding costs -Self-bootstrapping LP
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Coming soon. Learn more at: https://t.co/izPx6pov7h pic.twitter.com/KHXjp9qF5s
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— papertrade.xyz (@papertrade_xyz) May 12, 2026
Competitive Landscape
Compared to competitors like Hyperliquid and Lighter, which offer deeper markets and real-time settlement, or gTrade, which requires pre-funding, HONKAYO believes the mechanics are easily replicable. The primary advantages are seen in reliable payouts, pool liquidity, execution, and distribution.
Key Observations for the Future
Overlaying pre-launch projections with first-day data, three key areas warrant observation moving forward.
First, the mathematics of price manipulation: at 1000x leverage, a 0.1% move in the reference price effectively doubles the margin. If the reported multi-billion dollar nominal volume is accurate, a 10 to 20 basis point move would translate to hundreds of thousands to millions of dollars in paper profits, with the attacker’s cost on Hyperliquid limited to slippage and fees. While the payment curve discounts small fluctuations, the official range for this discount remains undisclosed.
Second, the $5 million cash cap may not be sufficient. The queuing mechanism allows winners’ claims to exceed the pool’s balance, with the excess becoming a debt owed to future losers. The cap limits immediate payout capacity, not the total debt incurred. The ultimate cost falls on queued winners and PAPER stakers. Traders on Papertrade avoid slippage, but the slippage is merely shifted to Hyperliquid, paid by the manipulator, becoming an attack cost.
Third, the leverage distribution on the first day: 5,836 addresses (73.3%) utilized 1000x leverage. Positions with 1000x leverage accounted for 89.4% of liquidations and 86.9% of margin losses, with a median time from opening to liquidation of just 7 minutes and 35 seconds. However, the remaining open nominal positions of approximately $1.979 billion correspond to only about $17.377 million in margin, averaging around 114x leverage.
It is speculated that most 1000x leverage positions were liquidated within minutes. The remaining open positions likely consist of lower leverage trades, aligning with MONI’s simulations suggesting that maximum leverage is not always the most cost-effective strategy. The top 15 profit earners were all long ETH positions. The champion, with $10,000 in margin, opened a $10 million nominal long position, held for 31 minutes, saw ETH rise by 0.78%, and profited approximately $66,400. Roughly calculated at 1000x, the initial profit should have been around $78,000. The actual received amount of about 85% suggests the difference is likely the discount from the payment curve and the 1% fee, serving as a practical demonstration of the “zero slippage” caveat.
Moving forward, attention should be paid to the metrics highlighted by MONI.
In conclusion, Papertrade is best viewed as a high-risk mechanism experiment rather than a stable trading venue. In the short term, the focus should be on the veracity of the manipulation allegations and the official response, as well as the rapid clearing of queued debts after significant market movements, rather than nominal trading volume.
If the team publicly releases its contracts and audit reports, adopts multi-source pricing, and clears all queued debts within a week following major market swings, the design will have passed its initial test. Conversely, if the allegations prove true and no remedies are implemented, even substantial trading volumes will merely be amplified numbers under 1000x leverage.
