PaperTrade Attracted $140M, Then Changed the Rules. Was It a Bait and Switch?

PaperTrade attracted about $140 million in USDC before launching on October 10 and briefly exceeded Nasdaq’s daily notional traded volume on one day, Laura Shin said. Jason Pegalotis described it as a fair-launch exchange on HyperEVM, distinct from Hyperliquid’s HyperCore. Users bet against a house pool rather than trading with one another or placing orders on an order book, so activity and volume did not necessarily demonstrate broad demand for leveraged trading.

The pool’s economics linked losing trades to PAPER issuance: losers’ margin funded the Mardingaler LP, and losing traders received newly minted PAPER that could be staked for USDC yield generated by platform trading. At launch, each dollar lost minted about 100 PAPER, with more generous issuance for early losses until roughly $2 million in losses. Winners received roughly 88% to somewhere in the 90s percent of their winnings. Pegalotis said withdrawals could be queued if the LP ran short; by the time of the discussion, about $57 million had been paid to PAPER holders through staking.

Pegalotis said the platform initially worked as intended for about a week, but HyperEVM’s limited throughput could leave position-closing orders queued long enough for highly leveraged traders to be liquidated. PaperTrade also used Hyperliquid’s price feed, so large trades on Hyperliquid could move PaperTrade’s prices. On launch day, a trader used large ETH market orders to move the price and profit from a PaperTrade short. The team manually locked the trader’s positions, but Pegalotis did not know the exact resolution. He called it an attack vector, not necessarily an exploit, and said the risk was disclosed in project documents.

About a week after launch, the team said it would not make PAPER transferable “at this point,” although transferability had appeared on the roadmap. Pegalotis said the team feared a transferable token could make price manipulation profitable: an attacker might use a PAPER short position to profit from a price move that would not justify the cost of moving the market on its own. He considered that concern valid but said he had gone back and forth on whether changing the rule was justified. He also noted that the on-chain project was not fully decentralized because the team retained control through a multisig.

One speaker said changing the rules after attracting deposits looked like a bait and switch, while distinguishing it from a conventional rug pull in which a team takes the funds and disappears. The concern was that some users accepted trading losses to earn PAPER because they expected to recover them by selling transferable tokens; transferability now appeared delayed indefinitely or possibly abandoned. The speaker also said expectations around token payback, yield, the pool, and transferability had changed since launch, leaving users to reconsider whether their capital remained well placed. The minting formula changed too: each dollar lost now earns a share of supply based on conditions at that moment, making a user’s eventual allocation uncertain.

Alex.hl attributed PaperTrade’s volume to speculators farming for a potentially transferable token rather than demand for 1,000x leverage. Ryan decrypto cited staking revenue of $84,500 with two hours left in a day, compared with $1.28 million the previous day and $2.1 million on Sunday, describing a 93% one-day drop. The speakers did not declare the project finished, but said sustaining activity could be difficult as token farmers withdraw and organic demand becomes clearer.