Paper Trading for Early Stakers and Arbitrage Strategies Revealed

This article is from:Max

Compiled by Odaily Planet Daily (@OdailyChina); Translator: Azuma (@azuma_eth)

In the first 8 hours after launch, Papertrade distributed a total of $23.9 million in dividends to stakers; in the following 37 hours, it distributed only $2.4 million.

These two numbers essentially summarize the state of the game. However, it’s still worth taking a few minutes to break down who made the money and how they did it—especially if you plan to mine the PAPER token this week.

Prior to Papertrade's launch, the highest-quality research came from Shaunda Devens at Blockworks Research, tempest at Delphi Digital, and another investment firm, schema. All three institutions provided extremely clear explanations of the underlying mechanics, but each estimated that the博弈 process would last several weeks.

The only one to have stood the test of time is an unsettling warning—Blockworks Research previously cautioned that arbitrageurs using hedging strategies could crowd out genuine traders, causing protocol LPs to stagnate. This is precisely our current situation.

To be honest, no one acted foolishly—it’s just that the pace of mechanism evolution far exceeded everyone’s pricing expectations.

Real traders incurred a net loss of $32.4 million on Papertrade, of which:

• $26.3 million flowed to PAPER stakers;
• $4.3 million is locked in the market maker LP pool;
• The remaining portion goes to developer fees and change.

The vast majority of these $26.3 million were claimed by early users who staked before approximately 22:00 UTC on the first day of listing. In practice, this means “whales dominate”—Papertrade’s relayer prioritizes large orders, causing a $75,000 transaction to be pushed beyond position 3,000 in the queue, while eight-figure orders are matched within seconds.

Two of the most representative addresses demonstrate two entirely different strategies for earning profits.

• Addresses starting with 0x2025 (arbitrage掠夺型):

This address moves the ETH mid-price by 10 to 20 basis points on Hyperliquid, then places a $200 million-sized opposite order on Papertrade. It won 296 out of 305 trades, with an average holding time of just 98 seconds. Although one stuck order resulted in a $450,000 liquidation loss, he still netted approximately $1.1 million. Although the Papertrade team (Jez, Blurr) claims he returned most of the funds, on-chain analysts butler and kook have presented on-chain evidence suggesting otherwise.

• Addresses starting with 0x35b2 (scale manipulation type):

According to Lookonchain data, the address generated $1.01 billion in trading volume, incurred a loss of $979,000, but recovered approximately $1 million in cash through staking, leaving its fiat principal roughly break-even. However, the key point is that it still holds 252 million PAPER tokens—about 4% of the total staked supply. At current yields, this holding generates roughly $14,000 in passive income per day. This is the real winner.

Also, to clarify, the Papertrade team did not cut the staking yield from 99% to 1%, as onchainmonk, an on-chain analyst, suggested.

The staking reward rules are —— receiving half of the 2% fee from profitable orders, plus a share of any surplus above $5 million in the LP pool. When the LP pool balance falls below $5 million, surplus distributions are automatically paused. The rules have never changed; only the status of the pool has.

Is it still profitable to enter now?

Here is the calculation formula for newcomers planning to enter today:

• Active wear is suicide: At today's minting rate, acquiring 1,000 PAPER tokens costs approximately $33 in hard losses;
• Hedging and spoofing: Use a long-short hedging strategy (100x leverage on both sides, close positions when volatility reaches approximately 1%), with a cost of approximately $4.50;
• Dividend yield: Since the last LP settlement distribution, each 1,000 PAPER staked earns approximately $0.055 per day.

In other words:

• The payback period for hedging farmers is approximately 80 days;
• Farmers with unilateral hard losses have a payback period of 590 days.
• The premise also assumes that the yield remains stable and no one else continues minting inflation — but this is impossible.

More critically, starting October 17, the difficulty will increase further, with the dividend trigger line rising from $5 million to $10 million on that day. As of the time of writing this article, the market maker LP pool stands at only $4.3 million, meaning the approximately $5.7 million in trader losses over the coming period will fully replenish the LP base pool without being distributed to stakers. Until the base pool is filled, stakers will receive only pure trading fees.

In my opinion, mining right now is not a sound way to earn interest—it’s a gamble: betting that more real gamblers will keep entering and depositing money, with losses large enough to push the LP pool past the $10 million mark. If you agree with this logic, use 100x leverage to hedge, strictly avoid unilateral liquidation, and ensure both sides of your orders have genuinely executed. If you don’t believe in it, there’s absolutely no need to rush in right now.

Four key metrics

Four key indicators will determine whether this is merely the first act or the final curtain:

• LP liquidity pools have surpassed $8 million and continue to rise: this is a precursor to the next large dividend distribution.
• Non-mining genuine trading volume: Only directional traders can bring liquidity to LPs; hedging farmers are essentially just inflating supply.
• Net long open interest (OI): Currently, net long exposure is approximately $150 million, while the pool funding is under $4 million. A clean 2.5% price rally would force profits to be paid out in queue rather than in immediate cash settlement.
• Can the settlement queue always be maintained at zero?

After October 17, I will review the data using the same model.