"Paranoia Combat" is largely the brainchild of Jon Chung1, a poster on rpg.net. You can see some of the basic implementations (and rationales) at this link. These solutions were established in response to the notion that Second Edition Exalted, as written, is too lethal — that is, there are enough things that will kill a non-maximized Solar in one action that the only reasonable combat tactic is to use Perfect Defenses to turtle up, using motes as a kind of video-game lifebar.
The key piece is the paranoia combo: Excellency + Shadow over Water [or Seven Shadow Evasion] + Reflex Sidestep Technique + Leaping Dodge Method. This combo costs 10 XP to purchase, is friendly with Infinite Mastery, allows the character to perfectly defend against any attack, allows the nullification of unexpected attacks and allows the character to break most flurries. Invoke this combo for every single action in combat, using a 2-die stunt to restore the expended Willpower.
It's considered "bad" because it turns the Exalted combat system into a sort of solved problem. In the face of an intricate mechanic with literally hundreds of charms to choose from, there is one correct solution, and it's one that renders all the action and strategy mostly irrelevant. That's disappointing, and points to flaws in the game that make Tactician players unhappy.
The term "2-7 Filter2" is a way of referring to these combos more specifically, in regard to the phases of combat where they are applied:
Step 2 perfect defense + step 7 perfect soak. Seven Shadows Evasion,
Heavenly Guardian Defense, Iron Skin Concentration (may not be viable
post-errata), Adamant Skin Technique, etc. Most efficient defense in
the game.
1 - As the White Wolf Forum closed down way before 2015, this is (now) an archived version on the Wayback machine.
2 - This page could not be found by the Wayback machine.
You've identified an opponent as your guy: you're paying extra attention to where he is and what he's doing, so that you can mess him up at a critical time.
In melee combat, it's like man-to-man defense in sports. You're always on him, always in the way. You're a major distraction because you're hard to ignore; on top of that, ignoring you usually means giving you huge a huge opening to do something nasty (you know: steal the ball / stab him in the guts).
Outside of melee, imagine a Legolas-caliber archer shooting down orcs left and right, for example, while all the while watching for the fateful moment that a leader (her mark) sticks his head up above the ramparts to have a clear look at the battle. She's doing all this other cool stuff but she's also always ready to make a punishing attack on her intended target.
Best Answer
A "Death Spiral" is something that can happen in games where your combat skill is affected by your health (or similar attribute). If you take a hit, your combat skill decreases slightly (making it harder for you to hit the opponent and/or easier for the opponent to hit you).
While there is a certain realism to this, it can often quickly lead to the "death spiral" where each hit makes it increasingly unlikely for the loser to come back, as they are getting consistently worse at attacking and/or defending.
It can lead to very lopsided combat, even against some seemingly well-matched opponents.