Source: Blockworks Research
Compiled and organized by BitpushNews
PaperTrade is a synthetic perpetual contract protocol built on Hyperliquid's HyperEVM, featuring up to 1000x leverage and a peer-to-pool model funded by trader losses.
PaperTrade launched on 10/10 and quickly became the hottest new trend among on-chain traders, with trading volume reaching a staggering $804 billion in just two days—surpassing Nasdaq—and open interest peaking at $10.1 billion.
This is what we’ll break down below: what this number means, how the protocol mechanism works, and what it means for stakers and new entrants.
Key Findings (TL;DR)
Papertrade has redesigned the peer-to-pool model without LPs. The pool is fully funded by traders' losses, while the PAPER token—which accumulates 50% of fees and all profits above $5 million—incentivizes traders to provide this funding. When the pool cannot pay, profits are converted into first-in, first-out debt.
Emissions are designed to be countercyclical. PAPER is minted at a rate of 100 per dollar lost, decaying to approximately 30 as cumulative profits approach $100 million, but returning to the maximum whenever the pool falls below $2 million, attracting losses when solvency is at risk.
The fee structure provides the pool with structural advantages. Profitable trades incur a 2% fee on profits plus a discount (haircut) of 10–50%, where the discount increases as price movement decreases; in our Monte Carlo simulations, the pool generated profits in all 600 simulated years, with a median annual return of $17.4 million.
Farming PAPER is likely profitable, but only with strategic execution. Valuing PAPER as the accumulated rewards plus a sale price capped at the farming cost, a delta-neutral pair yields 3.8x the cost at a daily trading volume of $100 million and 8.8x at $1 billion daily volume by the third month. In contrast, intentionally selling at a loss yields only 0.5x return, and breaking even through payments alone requires 31–33 months.
Although the risk of insolvency has been reduced, it has not been eliminated. The buffer cap is set at $5 million, and any amount above this is paid entirely to stakers, meaning short-term volatility could still deplete the buffer; furthermore, if queued debt grows large enough to prevent transactions, the capitalization incentive becomes ineffective, leaving the protocol unable to make payments during tail events.
Papertrade: Synthetic Liquidity Pool Model
Papertrade is a synthetic perpetuals platform built on Hyperliquid’s HyperEVM, offering traders up to 1000x leverage on BTC and ETH, betting against a synthetic profit pool. Unlike centralized limit order books (CLOB), where positions are settled between market makers and takers, Papertrade uses a pool model similar to Jupiter’s JLP and GMX’s GLP, where synthetic P&L is settled between pool depositors and traders.
Pool-based models were very common before the rise of CLOBs and retain unique advantages. They offer high liquidity because no market makers are needed to take the other side of trades, and there are no funding rates. The structure is simple: LPs deposit funds into the pool, which takes the opposite side of traders’ synthetic exposures; since traders often lose money over time, this arrangement is typically profitable. For example, if a trader opens a 100x BTC long position, there is no price impact and no perpetual position changes hands; the trader’s profits or losses are simply deducted from or credited to the pool.
However, this model carries significant risks. The pool is entirely passive and cannot respond to adverse flows; its entire premise relies on traders losing money over time. In tail events, unhedged exposures can lead to substantial losses, and in extreme cases, insolvency, preventing depositors from redeeming their funds. The model also requires a sufficiently large capital base to reliably pay winning traders. As a result, the traditional pool model has largely been replaced by modern variants, the most prominent of which is Variational, which uses net settlement and hedged positions rather than taking on naked directional exposure.
Innovation in the pool model
Papertrade is built on Hyperliquid's HyperEVM and represents another modern innovation: it offers 1000x perpetual contracts through Hyperliquid's precompiled contracts and HyperCore-based BBO pricing. It innovates on the standard pool model in two ways: i) making bankruptcy survivable, and ii) ensuring liquidity in the counterparty pool.
The counterparty pool for Papertrade does not accept external capital; it is funded entirely by traders' losses. It starts at $0, and since no one can deposit into or withdraw from it, it grows solely through losses, meaning that even during insolvency, no LP capital is at risk. Losses accumulate the pool to a $5 million buffer, and any excess is further distributed to PAPER stakers.
Traders still face bankruptcy risk when betting against the pool; however, the debts owed to them are formalized, and claims are settled on a first-in, first-out basis once the pool has available capital.
The tokenomics of PAPER create an incentive for traders to absorb losses and subsidize winners' gains, as PAPER is allocated to losers. Specifically, PAPER is the protocol's native token with an initial supply of zero and no pre-allocation; it is purely minted and distributed to losing traders in proportion to their losses, with the minting rate decreasing as the pool's cumulative profits increase.
Emissions decay from 100 PAPER per dollar lost to approximately 30 PAPER when cumulative profits reach $100 million.
Note that whenever the pool holds less than $2 million and faces insolvency risk, the emission rate reverts to the maximum of 100 tokens per $1 lost. Due to the accumulated value of PAPER, stakers earn half of every 2% fee and all profits from pools exceeding $5 million; this increased rate incentivizes traders to step in, absorb losses, and recapitalize the pool when it drops to dangerous levels.
Paper Trading Fee Schedule
In addition to incentivizing traders to absorb losses, Papertrade's leverage and fee structure makes the pool's long-term profitability highly likely.
Papertrade does not charge opening, closing, or funding fees; instead, a 2% fee is applied to profits upon closing, and discounts reduce the trader's share cap to 90% of profits, with discounts increasing as price movement decreases. For example, consider a trade with a $100 margin yielding a $100 profit: with 1000x leverage, requiring a 0.1% price move, the trader retains $72; with 100x leverage, a 1% move, retaining $86; with 20x leverage, a 5% move, retaining $88.
Over time, this asymmetric payment structure is expected to generate reliable and consistent returns for the pool. In a Monte Carlo simulation scaled to Ostium trader behavior, leveraging Papertrade’s leverage, fee schedule, $74.6 million initial deposit, and $100 million daily trading volume at launch, the pool ended in profit across all 600 simulated years, with a median of $17.4 million (the middle 90% of paths ranged from $11.8 million to $25.6 million), and every path was positive by day 30.
This does not eliminate the risk of insolvency: anything earned above $5 million by the pool is paid out as staking rewards, so its buffer never exceeds that level. However, over the long term, the pool’s cumulative P&L should trend upward, with traders stepping in during periods of shortfall.
PAPER: The value of PAPER
PAPER receives all earnings above $5 million from the pool, plus half of the 2% fee on each transaction, making it potentially valuable if expected lifetime earnings are positive; moreover, since the supply starts at zero, the earliest minted PAPER tokens capture the largest share of payments. It is also structurally inflationary, as new tokens are minted by the same group of losses that fund the pool.
The final value of PAPER equals its future cash flows, diluted by each newly minted token, and all relevant inputs—from trading volume to the multiple the market is willing to pay—are unknown prior to launch. As an illustration, we tested the viability of early farming under deliberately conservative assumptions: an average daily trading volume of $100 million, with pool yields calibrated to match Monte Carlo simulations of trader behavior after intentionally operating at a loss until the pool reached $5 million, and adjusted according to Papertrade’s fee schedule. We also include a scenario with $1 billion in daily trading volume to demonstrate how the dynamics change at scale.
Under these assumptions, payments are heavily front-loaded: half of the first-year payment for PAPER minted at launch is collected within the first three months, after which it is diluted by new supply. Future cash flows, segmented by entry point, are shown below.
PAPER is initially non-tradable, but assuming it becomes tradable, its return equals the cash flow received before exit plus the sale price. We set the upper limit of the sale price at the minimum current cost of farming it, assuming PAPER's price cannot sustainably exceed this cost.
Combining both, early farming was only beneficial for those who minted at low cost: when sold in the third month, the cheapest hedging pair yielded 3.8 times the cost at $100 million daily volume and 8.8 times at $1 billion, while pure losses returned only 0.5 times and 1.2 times respectively.
Pure loss farming carries additional risks: if PAPER never becomes tradable, returns depend entirely on payments; at a daily trading volume of $100 million, pure loss farming would take 33 months to recoup costs, while hedged pairs and directional trading require only one to two months. Overall, we believe early farming can be profitable, but only with disciplined trading, closing positions during large moves, and ideally eliminating price risk through hedging; 1000x gambling or pure loss farming yields little or no return.
Risk and Strategy
Although the expected value may be positive, we highlight two risks. First, there is a risk that the pool may not have sufficient capital to pay out profitable traders, given that the pool continuously distributes earnings exceeding $5 million to stakers. This should self-correct as new losses flow in; however, if the protocol’s debt grows large enough, traders may be prevented from trading, leading to a potential default scenario where winners are not paid.
Second, the activity may be dominated by delta-neutral farming rather than organic trading. Farming provides little net benefit to the protocol, as the amount redeemed by the profitable side of the pair roughly equals the amount contributed by the losing side, while trading still mints inflationary tokens. Nevertheless, we believe organic demand will exist, as traders are effectively subsidized through emissions.
In terms of risk, we believe the best strategy is:
Migrate existing traffic. As long as the pool has sufficient capital, moving trades from a DEX or CEX to Papertrade typically has positive expected value—the P&L remains unchanged, but you additionally capture emissions.
Hedge pair. If you are bullish on PAPER, a paired hedge trade has positive expected value; however, it is not risk-free and heavily depends on whether trading volume can be sustained.
Pure loss farming is not recommended, as it is typically not profitable.
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