On-chain records show a trader moving about $231 million of ether on Hyperliquid, the exchange whose prices Papertrade uses, on Saturday evening. The new venue's payout pool briefly fell by roughly half before recovering.
A new crypto derivatives venue that pays winners from a shared pool has had its first stress test, and its response was to change the limits rather than the design.
Papertrade, which offers leverage of up to 1,000 times and settles trades using prices from the Hyperliquid exchange, said on Sunday that traders had made manipulation "attempts" against its bitcoin and ether markets. It said the problem was "not an oversight in the mechanism design we spent six months working on," but arose because it had set open-interest caps loosely to handle demand at launch. It is now tightening those caps "both onchain and at the relayer level."
How the trade worked
Papertrade prices positions off the midpoint of Hyperliquid's best bid and offer, regardless of position size. That creates an opening: a trader who can push Hyperliquid's price briefly can profit on a much larger position at Papertrade.
On-chain records show what happened on Saturday evening. One wallet bought about 6,060 ether on Hyperliquid between 6:01 and 6:02 p.m. Eastern, lifting the price by roughly $3, or about 0.12%. At 6:03 it sold about 5,210 ether, pushing the price down by about $3.50. Across the evening the wallet traded about $231 million of ether on Hyperliquid and paid about $52,000 in fees there.
On Papertrade, the same trader recorded a profit of about $1.28 million on $3.18 billion of trading volume. The wallet deposited about $1.2 million and withdrew about $2.48 million, including a single withdrawal of $1.54 million at 6:06 p.m., three minutes after the last large Hyperliquid trade.
Later that evening the same wallet opened ether short positions at 660 times leverage, with notional value of about $297 million, which were liquidated at 10:31 p.m. for a loss of about $450,000.
The pool
Papertrade's own chart shows its payout pool falling from about $5 million to about $2.4 million during the episode and then recovering. The company said the pool holds $5 million and that it has paid $25 million to holders of its PAPER token. It said the profitable trader gave almost all of the gains back to the pool through new accounts, and that some users agreed to reverse manipulated trades. Wallet records do not show that: the wallet's withdrawals still exceed its deposits by about $1.28 million.
At launch, Papertrade allowed up to $1 billion of open interest per market on each side and $10 million per position. Its new limits are meant to make such activity "almost unprofitable."
What the fix does not change
Lower caps reduce how much any one attack can earn. They do not remove the incentive, because Papertrade still prices every position at Hyperliquid's midpoint regardless of size. A pool that halved in one evening also shows how thin the cushion is relative to the size of trades the venue allowed.
Hyperliquid itself is not the target of the strategy, but it is the reference price. Its own liquidity pool has absorbed losses from single traders before.
Two readings
One reading is that this was launch-phase tuning. The pool recovered, no payout queue built up, and tighter caps should make the trade uneconomic.
The other is that the venue has a structural weakness and has patched it with a limit. Any product that pays out on another exchange's price, without accounting for the size of the position, invites traders to move that price, and the wallet in this case left with more than it brought.
What to watch
Whether the claimed give-back appears on-chain, whether the pool holds steady under the new caps, and whether similar trades appear on other assets will show whether the fix is enough.