Papertrade Faces Oracle Manipulation Allegation as Its Loss-Funded Pool Holds About $3.1 Million

Since Papertrade went live on HyperEVM on Oct. 10 with more than $137 million in pre-deposits, the focus has shifted from launch-day volume to a question about its price feed. A pseudonymous observer, El33, alleges that a trader is draining the exchange's liquidity pool by nudging the one price Papertrade relies on.

No confirmation exists. The claim is an allegation from a single observer.

The alleged trade

El33 wrote that a trader opened large ETH short positions on Papertrade, sold ETH on Hyperliquid to push its midpoint price down by roughly 10 basis points, then closed the Papertrade shorts for a profit. El33 described a second leg in which the same trader switches to longs on Papertrade and then unwinds the Hyperliquid position.

"Seems like someone currently draining Papertrade LP by Oracle manipulation," El33 wrote, pointing to a wallet ending in 840e.

PaperDash, an analytics dashboard, shows about $1.73 million in realized trading gains for that wallet. That number does not show the gains came from manipulation, and it is not an established loss to the pool.

Marcin Kazmierczak, co-founder of oracle provider RedStone, shared the post and called it an "Interesting Oracle manipulation strategy on Papertrade during weekends." His post did not include a separate transaction analysis.

A second claim surfaced Oct. 11. A user on X called Boblob alleged that two wallets are making Hyperliquid trades of roughly $20 million each, moving ETH 10 to 20 basis points, and then opening Papertrade longs with notional values in the hundreds of millions of dollars. Boblob argued this exposes a vulnerability that must be patched. That claim is also unverified.

Why the price feed matters

Papertrade has no order book and no outside counterparty. Every trade is a synthetic swap between the user and a shared pool called the Martingaler LP. The contract reads Hyperliquid's best-bid-and-offer midpoint, the halfway point between the top buy and sell quotes, through a HyperCore precompile when a position opens and again when it closes. Those two readings fix the entry and exit prices.

No perpetual contract changes hands on Hyperliquid. That is how the design avoids slippage and funding payments. It also means one number from one venue prices every position.

The leverage makes small moves big. At 1000x, a roughly 0.1% move against a position could wipe out its margin, according to Bankless.

The protocol does include friction. Papertrade applies an asymmetric impact haircut to raw gains, taking a larger share from smaller price moves, then charges a 2% win fee on what remains. Each instrument also carries open-interest limits. Whether those safeguards blunt the strategy El33 describes has not been shown.

Papertrade's own documentation names best-bid-and-offer manipulation as the main unresolved protocol-level risk. It describes how an attacker could place a small limit order inside Hyperliquid's natural spread without filling it, shifting the midpoint Papertrade uses, and says the pricing pipeline has no independent reference price that can reject such a quote. Open-interest caps and the profit haircut can reduce the possible payoff, but the docs say manipulation and LP loss remain possible.

The pool and its limits

The pool started with zero dollars. It has no founder deposit and no upfront liquidity raise, and users cannot deposit into it. It fills only from trader losses and shrinks when traders win.

Papertrade's public protocol summary and PaperDash both showed about $3.14 million in the pool and an empty payout queue at the time observers flagged the strategy on Oct. 10. That does not show winners were waiting on payments at that snapshot.

The pool is also separate from customer money. The $137.1 million in combined launch-day total value locked included trader balances alongside house liquidity, so it was not all available to pay winners.

If the pool runs dry, profits go into a first-in, first-out queue and become on-chain debt claims. Later losses by other traders pay them from the front. When the pool falls below $2 million, the protocol mints 100 PAPER tokens for every $1 lost, which shifts the cost to PAPER holders through dilution.

Launch-day numbers

Early figures vary. Notional volume hit $14.4 billion in the first 10 minutes, and BTC open interest passed $3 billion shortly after launch. One tally put trader losses at $4.73 million within the first hour against more than $80 billion in nominal volume. PaperDash estimates net realized trader losses of roughly $18 million to $28 million over the first few days.

PAPER stakers were credited more than $10 million in USDC rewards in the opening hours, with estimates up to $12.6 million. That money came entirely from trader losses.

With the pool above $2 million, PAPER issuance has moved into a decay phase. Once the pool tops $5 million, additional gains can also flow to stakers.

What is unresolved

The open question is whether the alleged trades actually extracted money from the pool, and how much. Public data cited so far shows a healthy pool balance and no queue, alongside a wallet with $1.73 million in realized gains. A stretch in which traders win more than they lose would drain the pool, queue unpaid profits and trigger the 100-for-1 PAPER issuance. Either outcome will show on-chain.