Been musing about an answer to this, and @Jadasc has given a good answer, I'll give some of my own thoughts on both the mechanics of paranoia combat, the culture it comes from, and its extended impact on the game.
Essentially, as has been answered above, Paranoia Combat is the idea that all characters, regardless of their niche or chosen role, should never leave character creation without a suite of defensive charms. @Jadasc has given them for the Solar Exalted, but the same general principle applies for other types - you should have at least one perfect defense, a flurry-breaker and a surprise negation charm. What this does is ensure that no single attack can ever flat-out kill your character. This combo is invoked every single round of combat - with an added 2-die stunt to regenerate the willpower cost.
This has a couple of effects:
- It turns Exalted combat into wars of attrition, where both sides essential sit scowling behind massively layered defenses, growling at each other until someone runs out of essence. Essentially, He Whose Combo Collapses First loses. Which means essence regeneration charms are double-plus good.
- It represents a huge investment for non-Combat PCs, which puts them at a little bit of a disadvantage. The revisions the "Ink Monkeys" development team has put into character generation makes this sting a little less, but only because they've upped the power of a starting Solar-type Exalt. It's still essentially asking all characters, regardless of concept, to devote resources to a combat combo.
- It also disincentivizes offensive combos and charms. If everyone is hunkered down behind their perfect combo in the midst of Essence mote trench warfare, spending motes on flashy offensive charms that are going to get defended anyway is a bad idea.
How did paranoia combat come about? In full disclosure, I rather dislike it, so some of this may be biased.
Paranoia Combat became a particular concept for Exalted combat because of a fusion of some dubiously written rules, and in my mind outright actual paranoia. The problem is, in the 2nd Edition of Exalted, combat as written is too lethal. There are very clear "good" weapons, and even a single bad hit from them can kill a character - once their defensive charms drop, Exalts are rather fragile.
As such, Creation is a rather dangerous place.
There are however several assumptions built into this particular view of Exalted combat:
- "White Room" combat. Most of the analysis for Paranoia Combat assumes a setting similar to the "loading room" from the Matrix. A featureless expanse, rather devoid of context or flavor.
- An antagonistic GM. Most of the Paranoia Combat builds assumes the GM is absolutely, unequivocally, trying to kill the PCs. All NPCs are loaded for bear, having made optimal decisions. Choices are entirely made based on mechanics - the best weapon numerically is carried by everyone. Massively powerful Elder Exalts wait to pounce at every turn, and will unleash fully formed offensive combos on anyone hapless enough not to be hiding behind a perfect defense combo.
- The constant 2-dice stunts are possible. This one is the biggest assumption for me - you've assumed a particularly robust narrative ability within a numeric "solution" to Exalted combat. A 2-dice stunt requires a fairly compelling description of your action (beyond "I hit him with my sword!") using scenery, set pieces etc. for every. single. round. That's a very big if. Incidentally, this also makes whether your GM decides NPCs can stunt to be arguably the single most important game balance decision they can make.
As has been noted in the comments, 1 & 3 somewhat contradict each other. There are two possible explanations for this: (1) The "white room" has just enough furniture to last for a few rounds of combat. Or more to the point, the "white room" is actually shorthand for analysis that strips combat of any greater context beyond "Two Exalts enter, one Exalt leaves!" or (2) That the answer for rapidly diminishing Willpower being 2-dice stunts every round was added without much actual consideration of what that means for game play, and is something of a glaring weakness of Paranoia Combat both from a practical standpoint, and as a "solved" solution to Exalted combat.