How Papertrade Turns Liquidations Into Ownership

Most DeFi protocols only reward profitable traders.

Papertrade flips the model entirely, rewarding its users for losing. The result is one of the most unconventional, reflexive, and undeniably innovative mechanisms for onchain trading that the crypto industry has seen in years.

What is Papertrade?

Developed by pseudonymous X user @izebel_eth, Papertrade is an upcoming fully on-chain perpetual futures exchange built on Hyperliquid DerivativesHyperliquid is a Decentralized Exchange and L1 for perpetual futures trading.View Profile” class=”stubHighlight”> Hyperliquid via HyperEVM. The protocol promises traders:

• Up to 1000x leverage
• Zero slippage
• No funding rates
• No fees to open positions
• No gas costs passed to users

On the surface, it looks like another hyper-leveraged perp venue designed for degens, but underneath sits one of the strangest and most novel tokenomic experiments DeFi has produced in years.

Losing Is the Product 

What truly sets Papertrade apart is the design of its native PAPER token.

PAPER functions as a loss rebate token. It is distributed to traders the moment they realize a loss, whether by closing a position underwater or through liquidation. These tokens serve as a consolation claim on the protocol’s future value and can be staked to earn a proportional share of protocol revenue, which is continuously distributed in USDC.

According to Papertrade’s documentation, PAPER will be fairly launched, starting from a supply of zero with neither pre-mint, nor team allocation, nor VC allocation, nor airdrop, nor vesting schedule.

I studied the @papertrade_xyz docs by @izebel_eth

Something exciting for a change. Here’s why 🧵

A new DEX that makes insolvency a feature and trading losses mint PAPER tokens giving you a direct stake in protocol profits.

This can work (for a while), but may fail over time.… pic.twitter.com/3FaBvWocEF

— Duo Nine ⚡ YCC (@duonine) May 13, 2026

When traders on Papertrade close their position at a loss or are liquidated – the two actions that generate PAPER tokens – their forfeited funds flow directly to the protocol’s liquidity pool (LP). This LP is used to pay out the positions of profitable traders, with a small LP revenue share fee applied to winning positions that is redistributed among PAPER stakers.

Once the LP exceeds $5M, every dollar lost by traders (in addition to the LP revenue share fee) is owed to PAPER stakers, effectively soft-capping the liquidity pool beyond this value while allowing unclaimed funds to continue accruing within the LP contract.

In the event that the funds stored within the LP are insufficient to pay out a profitable trader’s position (i.e., the LP is insolvent), winnings of profitable traders will be queued on a first-in-first-out (FIFO) basis, and paid out as funds become available from other users’ losses.

There are no external counterparties on Papertrade. Instead, all trades are executed as synthetic swaps against the LP, which uses the Best Bid/Offer (BBO) – the median between the highest bid and lowest offer – for a crypto asset on Hyperliquid’s order book at a specific moment in time to price contracts.

Even if no trades on Hyperliquid are actually executed at this price, the synthetically derived midpoint is still used to determine a trader’s entry price and later calculate PnL upon exit.

proud to introduce @papertrade_xyz – a fair-launched, fully-onchain perpetuals exchange built on hyperliquid by @izebel_eth & @blurr

-1000x leverage
-0 slippage
-No funding costs
-Self-bootstrapping LP

coming soon. learn more at: https://t.co/vOfrclySxp pic.twitter.com/qQQ2dkvrvp

— jez (equity perps era) (@izebel_eth) May 12, 2026

Optimal Strategies

With Papertrade it will quite literally pay to be early…