Papertrade Halts PAPER Transfers as Team Cites Attack Risk to USDC Pool

A reversal from the original plan

The update marks a clear shift from Papertrade’s earlier messaging. In an Oct. 1 announcement and in pre-launch materials, the project had indicated that PAPER transfers would be enabled after enough time had passed. On Monday, however, the team said it had no plans at this stage to permit off-contract transferability.

The decision quickly affected related markets. Venues including Paragon and Aster, which had listed pre-market PAPER perpetuals, moved to delist them. The change also angered some users who had deliberately taken losses in order to farm PAPER under the expectation that it would later trade.

Why tradable PAPER is seen as a threat

Papertrade’s model routes trader losses into one shared USDC bankroll that acts as the house. Users who lose receive PAPER, and staking that token earns a share of protocol payouts, including revenue distributed once the pool exceeds its cap. In effect, PAPER represents a claim on the exchange’s future cash flow.

The team’s concern is that if PAPER can be shorted on outside venues, an attacker could pair that short with an attempt to damage the exchange’s pool. Papertrade prices trades using Hyperliquid’s midpoint, so pushing prices on Hyperliquid can affect Papertrade as well. The project had previously acknowledged that manipulation attacks are possible in principle, with the real question being whether they are economically worthwhile.

Papertrade’s own example was a $10 million pool where an attack on BTC or ETH prices might cost about $15 million, making the effort unattractive on its own. But if the same actor were also short roughly $10 million of PAPER on another exchange, a collapse in PAPER tied to a drained pool could offset the attack cost. In the team’s framing, a PAPER perpetual would become a leveraged wager on the solvency of the bankroll.

Tokenomics and reward changes are also being revised

Alongside the transfer decision, Papertrade outlined changes to issuance and rewards. Going forward, every $1 million in trader losses will mint about 0.1% of PAPER’s supply at that time, a design that shifts issuance toward newer participants while gradually diluting older holders. The reward rate has also been cut sharply: at launch, each $1 lost could earn up to 100 PAPER, while the current level is about 10.

The team said a bonus mechanism will still activate if the pool gets close to depletion, in order to attract more loss-taking when needed. These changes are set to be placed in a timelock and activated 24 hours later, pending final security checks. The new framework, according to the project, is intended to make PAPER function more like exchange rakeback than a freely tradable crypto asset.

What PAPER holders are left with

For holders, the immediate result is ownership of a revenue stream that cannot currently be exited through token sales. Data cited from DefiLlama showed Papertrade had distributed about $58 million to PAPER stakers since its Oct. 10 launch, although those payouts had slowed from roughly $6.7 million on Oct. 15 to an average of around $1.5 million per day across Oct. 17 to 19.

At that recent payout pace, the economics for new farmers looked much weaker. The source article estimated that 10 PAPER earned from a $1 loss would return roughly $0.002 per day, implying nearly 600 days to recover that dollar if distributions held steady. Lookonchain data cited in the report also indicated that 21 of the 25 largest losers remained underwater even after staking rewards were included.

Market pricing before delistings pointed to similar skepticism. Paragon settled its PAPER perpetual at $0.026, implying a valuation of about $230 million for the roughly 8.85 billion token supply. That sat well below what a full year of recent daily payouts would suggest if those distributions were sustainable, indicating traders did not expect the current revenue pace to last.

What comes next

The wording of Papertrade’s statement leaves open the possibility of a future change, but no timeline was offered. The team’s argument rests on the idea that deeper liquidity on Hyperliquid would make price manipulation more expensive and therefore reduce the appeal of attacking Papertrade’s pool. A more resilient pricing method could also help, though no replacement was announced.

For now, the only confirmed next step is the pending activation of the new minting and reward parameters after the 24-hour timelock, subject to final security checks. In the meantime, the episode is likely to be watched closely by similar high-leverage venues that tie user rewards to the health of a shared house pool.