PAPER flips NASDAQ

With coins like W and STRK up more than 100% on the week, PaperTrade launched on 10/10 and served up the perfect flavour of the week’s new PVP ponzi for onchain traders. We covered the protocol in our pre-launch overview, but the TL;DRTLDR (since we know most of us are degens and just want to know what buttons to press, and in what order) is that their take on the peer-to-pool model is genuinely interesting despite the risks, and we believed pre-launch delta-neutral strategies (and even pure loss farming, if early enough) would be constructive. Two days after launch, the economics have already changed.

In just two days, volumes have hit $804B, flipping NASDAQ, and open interest peaked at $10.1B. The game, as expected, has already slowed down, with hourly volumes down to $6.7B from a $102B peak, and open interest down 95% to $471M.

But what does this mean for stakers? Our thesis on PaperTrade was that getting in early was essential, for two main reasons: losses are shared among PAPER stakers, and in the beginning there are fewer stakers to split them with. Early “loss rushing” led to aggressive losses being distributed, as players ate losses for tokens; later, delta-neutral farming would dilute holders while adding little value.

And that’s exactly what played out. Loss farming has already put early minters well ahead, driven by 1) a small PAPER supply at the start, and 2) large realized losses flowing to those first stakers. But as aggressive loss farming gives way to delta-neutral farming, protocol revenue (traders’ net losses) falls, and with it the effective price of minting PAPER relative to a real loss.

To illustrate: PAPER is minted on losses, at about 31 PAPER per $1 at today’s rate.

• Pure loss farming: a $200K loss mints ~6.0M PAPER, with ~$198K going to stakers or topping up the pool.

• Delta-neutral farming: the $200K lost on one leg mints the same 6.0M PAPER, but the winning leg takes most of it back, so the protocol keeps only ~$27K.

That’s why, even though minting PAPER should now cost about 3.2x what it did at launch, what stakers receive per new PAPER has fallen, from nearly $5 per 1,000 new PAPER during the rush to about $2.40 since. Adjusted for inflation, each staked PAPER now earns roughly 99% less per hour than it did during the rush.

So what does this mean for new traders? It’s important to realise this was completely expected and normal for a new launch. PaperTrade is in no way dead just because the post-launch hype has died. But it does mean the period for aggressive farming is over, and you’ll get inflated away by delta-neutral farmers minting new PAPER without taking on the same loss.

— Shaunda