Katana utilizes three mechanisms—Vault Bridge, on-chain liquidity, and AUSD government bond yields—to continuously invest bridged assets and transaction fees into DeFi protocols, activating idle capital and improving capital utilization efficiency. With over 95% of its TVL actively deployed, far exceeding the 50%-70% of most chains, Katana has built a DeFi ecosystem characterized by efficient capital operation and incentives for practical use.
Article author and source: Tiger Research
This report was written by Tiger Research. What if bridging assets could be utilized? We conducted an in-depth analysis of Katana, a blockchain that never sleeps. It reinvests 100% of its on-chain and off-chain yields and transaction fees into DeFi.
Key points
- Most Layer 2 blockchains lock up the bridged assets without using them. Katana deploys these assets into Ethereum lending protocols to generate yield, and then redistributes the yield as incentives for DeFi protocols.
- Storing assets in storage does not generate any returns. Users must deploy capital to Katana's DeFi protocol to earn additional rewards.
- As of Q3 2025, over 95% of Katana's TVL was actively deployed in DeFi protocols. This contrasts with most chains, whose utilization rates range from 50% to 70%.
- Katana reinvests 100% of its net sorter fee revenue into liquidity provision, ensuring stable trading conditions even during periods of market volatility.
1. Why is capital idle?
What happens to your funds when you cross-chain from Ethereum to Layer 2?
Source: Tiger Research
Most people think their assets have simply been transferred. In reality, the process is closer to freezing. When you deposit assets into the bridge contract, the contract holds them in custody. Layer 2 mints an equal amount of tokens. You can trade freely on Layer 2, but your original assets on the mainnet remain locked and idle.
Source: Tiger Research
Consider a simple analogy. You store items in a storage facility and receive a retrieval voucher. This voucher can be transferred to someone else. However, the items themselves remain in the storage facility until you retrieve them.
This describes how most Layer 2 bridges work. Assets held in Ethereum custody contracts do not generate any yield. They passively wait until users withdraw them back to the mainnet.
What if you could earn DeFi yields on the mainnet through bridge deposits, while still having access to fast, low-cost trading on Layer 2?
Katana answered the question directly: The capital invested in bridging will not be idle. It will be utilized.
2. How Katana got the capital moving.
Katana activates capital through three mechanisms:
- Cross-chain assets are deployed to the Ethereum lending market to generate revenue.
- Transaction fee revenue is reinvested into liquidity pools.
- The native stablecoin AUSD earns yields from US Treasury bonds.
External capital is in operation, and capital generated on-chain is also in operation. These three mechanisms work together to eliminate idle assets on Katana.
2.1. Vault Bridge
The first mechanism is Vault Bridge . When a user sends assets to Katana, the original assets remaining on the Ethereum mainnet are deployed to the lending market to generate interest.
Source: Agglayer, Tiger Research
When you transfer USDC from Ethereum to Katana, these assets are not simply locked. On the Ethereum mainnet, they are deployed to a curated vault strategy in Morpho (a mainstream lending protocol). The resulting yields are not directly distributed to individual users, but are collected uniformly at the network level and then redistributed as rewards to the core DeFi markets on Katana.
On Katana, users will receive corresponding vbTokens, such as vbUSDC. This token can be freely used within Katana's DeFi ecosystem.
Here we need to clarify a common misconception. vbToken cannot be compared to staking derivatives like stETH from Lido. stETH automatically appreciates in value as staking rewards accumulate.
Source: Coingecko
The mechanism of vbToken is completely different. Holding vbUSDC in a wallet will not increase the quantity or price. The yield generated by the Vault Bridge on Ethereum will not flow to individual vbToken holders, but will instead flow to Katana's DeFi liquidity pools. These revenues will be periodically distributed to the network to strengthen the incentive mechanisms of the Sushi liquidity pool and the Morpho lending market.
Users can only benefit by actively deploying vbTokens. By depositing vbTokens into Sushi liquidity pools or into lending strategies offered by platforms like Yearn, users can earn basic returns plus additional rewards from Vault Bridge. Simply holding vbTokens will not generate any returns.
Katana rewards the active use of assets, not passive holding. Capital that is in circulation is rewarded, while idle capital is not.
2.2. Chain-Owned Liquidity (CoL)
The second mechanism is Chain Owned Liquidity (CoL). Katana will collect 100% of the net sorter fee revenue (i.e., transaction processing fees minus Ethereum settlement costs).
The foundation uses these revenues to directly become a liquidity provider, supplying assets to the Sushi trading pool and the Morpho lending market. This liquidity is owned and managed by the chain itself.
This creates a self-reinforcing cycle. As users trade on Katana, sorter fees accumulate. These fees are converted into on-chain liquidity, further deepening the liquidity pool. Slippage decreases, lending rates stabilize, and the user experience improves. A better experience attracts more users, generating more fees. The cycle continues.
Theoretically, this structure is particularly effective during market downturns. External liquidity, being highly liquid, tends to withdraw rapidly under market stress. In contrast, on-chain liquidity is designed to remain in place at all times, allowing the pool of funds to operate continuously and absorb market shocks more effectively.
In effect, this sets Katana apart from most DeFi systems that rely on token issuance to incentivize external capital. By directly maintaining its own liquidity, the network is committed to achieving more stable and sustainable operations.
2.3. AUSD Treasury Bond Yields
The third mechanism is AUSD, Katana's native stablecoin. AUSD is backed by US Treasury bonds, and the off-chain revenue generated from these bond holdings flows into the Katana ecosystem.
Source: Agora
AUSD is issued by Agora. The collateral backing AUSD is invested in physical U.S. Treasury bonds. The interest earned from these bonds accumulates off-chain and is then periodically transferred to the Katana network to strengthen the incentive mechanism of the liquidity pool denominated in AUSD.
If Vault Bridge generates on-chain revenue, then AUSD generates off-chain revenue. These two sources of income are fundamentally different. Vault Bridge revenue fluctuates with the Ethereum DeFi market, while AUSD revenue is pegged to US Treasury yields and is relatively stable.
This allows Katana to diversify its revenue structure. Off-chain returns provide a buffer when on-chain markets fluctuate; and government bond returns support overall returns when on-chain returns are low. This structure spans both the crypto market and traditional finance.
3. Locking up capital vs. making capital circulate
As mentioned earlier, most existing cross-chain bridges choose to simply lock assets for a reason—security. When assets are not moved, the system design remains simple, and the attack surface is limited. Most Layer 2 networks use this approach. While secure, the capital remains idle.
Katana has taken the opposite stance. Activating idle assets introduces additional risks, a trade-off Katana is very candid about. Instead of avoiding risk, the network partners with established risk management experts in the DeFi space, including companies like Gauntlet and Steakhouse Financial.
Source: DefiLlama
Gauntlet and Steakhouse Financial are seasoned risk management firms in the DeFi space, with extensive experience in setting parameters for mainstream lending protocols and advising leading DeFi projects. Their role is similar to that of a professional asset management firm in traditional finance, responsible for assessing which protocols to allocate capital to, determining appropriate position sizes, and continuously monitoring risk exposure.
Source: Morpho
No financial system can provide 100% security, so concerns about residual risks are reasonable.
However, Katana partners with top-tier risk management firms and maintains a conservative vault structure. An internal risk committee oversees operations. Additional security measures include multiple layers of protection, such as a liquidity buffer provided by Cork Protocol.
4. Katana's DeFi Utopia
The current DeFi market faces the problem of liquidity fragmentation. Pools trading the same asset are scattered across different chains and protocols, which reduces execution efficiency, increases slippage, and lowers capital utilization. Some users profit from these inefficiencies through arbitrage, but most users simply have to bear the higher costs.
Katana solved this problem at the system level.
Vault Bridge and on-chain liquidity centralize liquidity within the core protocol. This results in improved transaction execution efficiency, reduced slippage, and more stable lending rates. Most importantly, yields from idle assets on the Ethereum mainnet are added to the base yield, increasing the overall return rate.
Source: Morpho
Katana's incentive structure can significantly reduce actual borrowing costs at specific points in time, and even create negative interest rates depending on market conditions and the reward scheme. This is because the returns from Vault Bridge, CoL, and AUSD are reinvested in the core market. However, it's important to note that these are incentive-driven outcomes that vary with market conditions.
As a result, as of Q3 2025, over 95% of Katana's TVL has been actively deployed in DeFi protocols. In contrast, most chains only achieve between 50% and 70% of their capital utilization. Ultimately, Katana is building a chain where capital never sleeps, a system that truly rewards actual use.
Katana never sleeps.
