On its launch day, Papertrade was drained of 1.28 million USD

Written by: Little Cake

Eight hours after Papertrade went live, one wallet demonstrated how to make money using it.

A Textbook Operation

First, what is Papertrade: a perpetual contract platform built on Hyperliquid, with the main selling point being 1000x leverage. It just launched on October 10, has no order book, no market makers, and a USDC liquidity pool acts as the counterparty for everyone. When you go long, the pool goes short; when you profit, the money comes from the pool.

How is pricing determined? It directly reads the midpoint of the best buy and sell prices on Hyperliquid.

Remember these two points: the pool passively takes orders, and prices come from the outside. What happened next revolves around these two points.

Just after six o'clock that evening, one address bought about 6060 ETH on the Hyperliquid spot market, pushing the price up by about $3. What was the increase? 0.12%. Under any normal leverage, this fluctuation wouldn't even cover the transaction fees.

But Papertrade offers 1000x leverage. 0.12% multiplied by 1000 equals 120%. This address simultaneously opened a long position on Papertrade, and as soon as the price moved, the margin doubled directly.

An hour later, the same operation was reversed: first, a short position of 30 ETH was opened on Papertrade with 660x leverage, nominal value of $297 million. Then, it rushed to Hyperliquid to sell about 6590 ETH, crashing the price down.

The total transaction fees spent on Hyperliquid amounted to about $52,000. The money withdrawn from Papertrade was $1.28 million. The return on investment ratio was nearly 1:25.

The Block checked the on-chain records for this address: on that day, about $1.2 million was deposited, and about $2.48 million was withdrawn. Looking back further, this address has been trading on Hyperliquid since February 2025, starting with $2 million, accumulating a trading volume of $14.2 billion, netting a profit of $13.1 million.

An experienced trader who has been navigating Hyperliquid for nearly two years figured out its pricing mechanism on the first day of Papertrade's launch.

Why Could This Operation Work?

The design of Papertrade is actually not hard to understand: it aims to create a minimalist perpetual contract exchange. It eliminates the order book, market makers, funding rates, and slippage, directly betting against all traders with one pool. Losers' lost money supports the pool, winners take money from the pool, and losers can also receive PAPER tokens as compensation. The platform calls this "turning liquidation into ownership."

This model can operate based on one premise: most high-leverage traders will lose money. As long as there are more losers than winners, the pool will grow, PAPER will have dividends, and the system will keep running. In fact, this is true; Papertrade claims the pool currently holds $5 million and has already distributed $25 million to PAPER stakers. Within two days, the total value locked (TVL) approached $70 million, with over 10,000 active addresses. Market demand is real.

However, this model has a structural weakness: pricing is not in its own hands.

Market makers at traditional exchanges will actively adjust quotes if they see a large position in one direction, pricing in the risk. The pool of Papertrade will not. It takes orders at whatever price it reads, regardless of whether the counterparty is a small trader with a $100 margin or an experienced trader with a carefully constructed nominal position of $297 million.

It's like opening a casino where the odds are determined by the neighboring casino, and your gamblers can run next door to change the odds at any time. As long as the cost of changing the odds is lower than the money won at your place, this business can succeed.

$52,000 in costs, $1.28 million in revenue. Clearly, this business is very viable.

What Does the Platform Say?

Papertrade's response is: this is not a mechanism design issue, but rather that the position limits were set too loosely in the early stages, and they are tightening them.

This statement is not wrong, but only partially correct. Tightening the position limits can indeed reduce the profit margin of single attacks to an unprofitable level. But conversely: If a platform that promotes 1000x leverage has its actual position limits constrained by risk control to a very small size, how much practical significance does the 1000x leverage still hold?

The more fundamental contradiction is: this is not a problem unique to Papertrade. As long as a platform's pricing comes from the outside, the counterparty is a passive pool, and the leverage is high enough that even slight price fluctuations can trigger massive gains or losses, those who move prices can profit.

Hyperliquid's own HLP liquidity pool has already been taught a lesson by similar methods at least twice. In March 2025, a giant whale manipulated the ETH position, causing HLP to lose about $4 million. In November of the same year, the POPCAT incident resulted in another loss of $4.9 million. The pattern is the same: moving prices at point A and harvesting at point B.

Papertrade layered this model: it is built on top of Hyperliquid, using Hyperliquid's prices as its own quotes, effectively creating a higher-leverage casino in a market that has already been proven to have movable prices.

Who Pays the Bill?

The DeFi derivatives sector is undergoing a leverage arms race. 50x, 100x, 500x, 1000x, each new platform tries to attract traders with higher multiples and lower friction.

Traders are indeed drawn in. But when leverage is pushed to the limit, the risks of pricing and repayment ultimately fall on the liquidity pool. In centralized exchanges, market makers, risk control teams, and insurance funds share these risks, which are costs but allow the system to withstand shocks. Papertrade has cut out all these intermediaries, providing traders with an ultimate experience, while transferring the costs to the LPs in the pool.

"Turning liquidation into ownership" sounds cool. But if the pool continues to be drained in a targeted manner, the ownership of PAPER is anchored to a continually shrinking base.

The $1.28 million from this incident is not fatal for Papertrade; the platform is still operational, and the TVL is still increasing. However, the structural issues it exposes will not disappear just by tightening a few parameters.

Selling 1000x leverage is about excitement, but the other side of excitement is fragility.