Papertrade Suspends PAPER Transfers to Prevent Shorting, Raising Doubts About Its 'Loss Mining' Model

Author: Nancy, PANews

Huang Licheng (Machi Big Brother) has found the perfect project for himself, because even trading losses can be mined.

This meme circulating in the community refers to Papertrade, a perpetual contract protocol that has been live for only ten days. It quickly gained popularity with its "loss mining" mechanism, becoming a highly watched on-chain experiment with up to 1000x leverage in the DeFi market, and its protocol revenue once ranked among the top across all networks.

However, behind the impressive data, its protocol revenue is highly dependent on trader losses, user activity and capital inflows have begun to slow, and the postponement of the PAPER token transfer plan has sparked community controversy.

PAPER Transfers Suspended to Prevent Shorting Attacks, Pre-Market Contracts Delisted by Multiple Platforms

Currently, Papertrade is embroiled in community controversy due to adjustments to the PAPER token mechanism.

On October 20, Papertrade announced that it would upgrade its protocol contracts and temporarily not open the transfer function for PAPER. At the same time, it introduced time-based fee rates targeting high-frequency arbitrage bot strategies and adjusted the token minting mechanism to prevent "mint straddle attacks" and gradually dilute early holders.

Regarding this series of adjustments, Papertrade explained that the protocol is a relatively complex financial primitive with high difficulty in risk management, and PAPER is more tightly bound to the protocol's economic model than most protocol tokens, thus requiring stricter risk control measures. If PAPER transfers were opened, external perpetual contract markets could short the "liquidity pool solvency," and the target amount for manipulation attacks would rise from the pool size to "pool + PAPER short exposure," while external markets are not within their control. The official example stated that assuming the pool size is $10 million, if an attacker needed to invest $15 million to manipulate the price of Bitcoin or Ethereum, this approach would not be feasible because it would ultimately result in losses. However, if the attacker could also establish a $10 million PAPER short position, the situation would be completely different.

But this news has caused dissatisfaction in the community. Many users pointed out that the official had previously signaled expectations of opening PAPER transfers, and some participants invested funds and trading costs in mining based on this expectation. Now that the transfer function has been postponed, the PAPER already mined cannot be freely traded and can only become a standalone coin.

For users who obtained PAPER through trading losses, the temporary inability to transfer tokens also means that direct cash-out channels are restricted. Currently, the relatively clear yield path is to stake PAPER and receive USDC dividends, but this yield will be diluted as token supply increases, and whether the protocol revenue model can be sustained remains uncertain.

Some users expressed understanding. In their view, restricting token transfers and adjusting the issuance mechanism, while weakening the advantages of early miners and potentially constituting a short-term negative, helps reduce potential manipulation risks from the perspective of long-term protocol operation and is a necessary risk control measure.

Affected by this news, PAPER pre-market contracts were delisted by multiple platforms. Aster announced the delisting of PAPER pre-market perpetual contracts and adjusted the relevant market to reduce-only mode. The platform stated that this move is a preventive measure aimed at managing market risk and maintaining orderly trading. Notably, Aster completed both the listing and delisting of PAPER pre-market perpetual contracts on the same day. Crypto perpetual index trading platform Paragon also announced the suspension of PAPER trading and completed settlement, explaining that since PAPER transfers are temporarily not open, the market lost the spot price basis for future price convergence.

Over $60 Million in Ten Days, More Than 80% of Revenue from Trader Losses

Built on HyperEVM, Papertrade is a highly popular on-chain protocol recently. With up to 1000x leverage and the ability to turn losers into protocol shareholders, Papertrade quickly broke out with this controversial innovative mechanism, attracting the attention of many airdrop hunters.

Unlike traditional perpetual contract exchanges, Papertrade does not use an order book matching system and has no external market makers. Instead, the protocol's own USDC liquidity pool directly takes on user trades. Its trading price references the midpoint of the best bid and best ask on the Hyperliquid order book, and currently supports only BTC and ETH.

More notably, Papertrade adopts a zero initial liquidity model, not accepting external capital injections from teams or VCs. The liquidity pool mainly accumulates through trader losses. When closing profitable positions, the principal is returned immediately, and profits are paid from the pool; if funds are insufficient, the unpaid portion is recorded as debt in a queue and repaid in order after subsequent losses replenish liquidity.

To attract traders and drive pool growth, Papertrade launched PAPER, a token with zero initial supply, using a fair issuance mechanism that mints tokens only to traders who close at a loss or are liquidated. In the initial stage, when the pool size is below $2 million, each $1 loss earns 100 PAPER, and the minting rate decreases as the pool expands. Additionally, PAPER holders can stake tokens to share protocol revenue distributed in USDC.

To further lower the trading threshold, Papertrade also adopts a fee model different from traditional exchanges: no fees, spreads, or funding rates on opening positions, and traders do not bear gas fees; when closing profitable positions, the protocol earns revenue through a profit deduction mechanism and a 2% profit fee.

Trading losses usually mean asset shrinkage, but Papertrade goes against the grain, attempting to turn losses into a form of "mining."

Judging from the data since launch, Papertrade's growth momentum is strong. DeFiLlama data shows that since its launch on October 10, Papertrade's cumulative trading volume has reached $1.4 trillion, with over 23,000 accounts. In just ten days, the protocol's cumulative revenue was approximately $62.45 million, with revenue of $30.56 million over the past week, second only to Circle and ranking third across all networks. Meanwhile, $57.95 million of the cumulative revenue was distributed to PAPER token stakers, accounting for 92.7% of total revenue.

However, behind the impressive data, the protocol revenue does not mainly come from regular trading service fees but is highly dependent on sustained net losses by traders, with a very low proportion of protocol fees extracted from profitable closes. Specifically, Papertrade's revenue mainly comes from LP surplus, trading fees, and liquidation fees. Among them, LP surplus is approximately $52.72 million, accounting for 84%; trading fees are approximately $8.36 million, accounting for 13%; liquidation fees are approximately $1.37 million, accounting for 2%.

Thus, the current protocol revenue of Papertrade contains significant "water."

User and Capital Growth Momentum Slows, Most Large Traders Still in Loss

Now, Papertrade's market heat has begun to cool, with both user growth and capital inflows showing signs of slowing.

DeFiLlama data shows that as of October 20, Papertrade had approximately 7,432 active addresses, accounting for only 31.4% of total addresses. Although the number of active addresses has remained relatively stable recently, it has dropped by about 42% from its peak. Daily new addresses have also continued to decline, with the latest data at only 9.6% of the peak period, indicating a clear slowdown in new user growth.

Capital inflows are also slowing. PaperDash data shows that Papertrade's cumulative deposit size has exceeded $340 million, with a single-day deposit peak approaching $150 million. However, the momentum of capital inflows has weakened significantly recently, with a cumulative net outflow of approximately $11.35 million over the past 7 days, including a single-day net outflow of approximately $7.46 million on October 20.

From the actual profit and loss of traders, loss mining has not changed the reality that most participants bear trading losses. PaperDash data shows that as of October 20, traders' cumulative losses were approximately $28.1 million, and even after including staking rewards, the cumulative loss was approximately $2.98 million. Stakers have received approximately $56.33 million in dividends, with only about $2.28 million in the last 24 hours, just 4% of the total.

According to Lookonchain statistics, among the 25 traders with the largest losses on Papertrade, 21 are still in a loss state after including USDC rewards, and only 4 achieved profits. These 25 traders collectively generated $111.5 billion in trading volume and received 2.06 billion PAPER, accounting for 23.4% of the total token supply; they have also claimed $11.61 million in USDC rewards, accounting for 20.6% of all USDC rewards. High-leverage player "Machi Big Brother" Huang Licheng is a typical loss case among them, with cumulative trading volume of $1.56 billion and realized losses of $833,000, ranking 10th on the loss leaderboard. After receiving an airdrop deduction of 437,000 PAPER, his account still lost $424,000.

Currently, the minting rate of PAPER is also weakening. Now, each $1 loss can only mint about 10.3 PAPER, a decrease of about 90% from the initial 100 at launch. This means the high token incentives enjoyed by early participants are shrinking. But currently, the pool balance is approximately $4.96 million, and the net value after deducting unrealized floating losses is close to $4.09 million, with zero queued liabilities.

It should be noted that currently, the long position size on Bitcoin on Papertrade is significantly higher than the short position. If Bitcoin continues to rise, long traders may concentrate on taking profits, and the pool will face greater profit payout pressure. The safety cushion left in the pool by the protocol is designed to be limited to about $5 million. Once profit payout demand exceeds available funds, the pool could be rapidly depleted and trigger payout queues. In contrast, if the market falls, long losses will replenish liquidity in the pool, and short-term payout pressure will be relatively smaller.

For Papertrade, turning trader losses into a growth starting point is not difficult. The real test is whether, after short-term heat gradually fades and incentive mechanisms continue to shrink, it can still maintain stable operation of the liquidity pool and user confidence. Perhaps this is the key to testing whether this on-chain experiment can go further.