This report is authored by Tiger Research. What if bridged assets could be utilized? We conducted an in-depth analysis of Katana, a blockchain that never sleeps. It reinvests 100% of on-chain, off-chain yields and transaction fees back into DeFi.
Key Takeaways
- Most Layer 2s lock bridged assets without using them. Katana deploys these assets into Ethereum lending protocols to generate yield, then redistributes the yield as incentives for DeFi protocols.
- Storing assets in custody does not generate any returns. Users must deploy their capital into Katana's DeFi protocols to earn additional rewards.
- As of Q3 2025, over 95% of Katana's TVL is actively deployed in DeFi protocols. This contrasts with most chains, where utilization rates range from 50% to 70%.
- Katana reinvests 100% of net sequencer fee revenue into liquidity provisioning, maintaining stable trading conditions even during market volatility.
1. Why Capital Sits Idle
What happens to your funds when you bridge from Ethereum to Layer 2?
Source: Tiger Research
Most people think their assets are simply transferred. In reality, the process is closer to freezing. When you deposit assets into a bridge contract, the contract custodies them. The Layer 2 mints an equivalent amount of tokens. You can trade freely on the 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 claim ticket. This ticket can be transferred to someone else. But the items themselves remain in storage until you retrieve them.
This describes how most Layer 2 bridges work. The assets custodied in the Ethereum escrow contract do not generate any yield. They sit passively, waiting until users withdraw them back to the mainnet.
What if bridge deposits on the mainnet could earn DeFi yield, while you still get fast, low-cost transactions on the Layer 2?
Katana directly answers this question. Capital entering the bridge does not sit idle. It gets put to work.
2. How Katana Puts Capital to Work
Katana activates capital through three mechanisms:
- Bridged assets are deployed to Ethereum lending markets to generate yield.
- Transaction fee revenue is reinvested into liquidity pools.
- The native stablecoin, AUSD, captures US Treasury yield.
External capital is put to work, and capital generated on-chain is also put to work. These three mechanisms collectively eliminate idle assets on Katana.
2.1. Vault Bridge
The first mechanism is the Vault Bridge. When users send assets to Katana, the original assets left on the Ethereum mainnet are deployed into lending markets to earn interest.
Source: Agglayer, Tiger Research
When you bridge USDC from Ethereum to Katana, these assets are not simply locked. On the Ethereum mainnet, they are deployed into curated vault strategies on Morpho, a leading lending protocol. The yield generated is not distributed directly to individual users but is instead collected at the network level and then redistributed as rewards to core DeFi markets on Katana.
On Katana, users receive corresponding vbTokens, such as vbUSDC. This token can be used freely within Katana's DeFi ecosystem.
A common misconception needs clarification here. vbTokens are not comparable to staking derivatives like Lido's stETH. stETH automatically increases in value as staking rewards accumulate.
Source: Coingecko
The mechanism for vbTokens is entirely different. Holding vbUSDC in a wallet does not increase its quantity or price. The yield generated by the Vault Bridge on Ethereum does not flow to individual vbToken holders but to Katana's DeFi capital pools. This revenue is periodically distributed to the network to enhance incentive mechanisms for Sushi liquidity pools and Morpho lending markets.
Users only benefit by actively deploying their vbTokens. By supplying vbTokens to Sushi liquidity pools or lending strategies offered by platforms like Yearn, users can earn base yield plus additional rewards from the Vault Bridge. Simply holding vbTokens yields no return.
Katana rewards the active use of assets, not passive holding. Capital that moves gets rewarded; capital that sits idle does not.
2.2. Chain-owned Liquidity (CoL)
The second mechanism is Chain-owned Liquidity (CoL). Katana captures 100% of net sequencer fee revenue (i.e., transaction processing fees minus Ethereum settlement costs).
The Foundation uses this revenue to directly become a liquidity provider, supplying assets to Sushi trading pools and Morpho lending markets. This liquidity is owned and managed by the chain itself.
This creates a self-reinforcing cycle. As users transact on Katana, sequencer fees accumulate. These fees are converted into chain-owned liquidity, further deepening the pools. Slippage decreases, borrowing rates stabilize, and the user experience improves. A better experience attracts more users, generating more fees. The cycle repeats.
In theory, this structure is particularly effective during market downturns. External liquidity is highly mobile and often flees quickly during market stress. In contrast, chain-owned liquidity is designed to remain in place, allowing pools to continue functioning and absorb market shocks more effectively.
In practice, this places Katana in stark contrast to most DeFi systems that rely on token emissions to incentivize external capital. By directly maintaining its own liquidity, the network aims for more stable and sustainable operations.
2.3. AUSD Treasury Yield
The third mechanism is AUSD, Katana's native stablecoin. AUSD is backed by US Treasuries, and the off-chain yield generated from these Treasury holdings flows into the Katana ecosystem.
Source: Agora
AUSD is issued by Agora. The collateral backing AUSD is invested in physical US Treasuries. Interest earned from these Treasuries accumulates off-chain and is then periodically channeled to the Katana network to enhance incentive mechanisms for pools denominated in AUSD.
If the Vault Bridge brings on-chain yield, then AUSD brings off-chain yield. These two revenue sources are fundamentally different. Vault Bridge yield fluctuates with Ethereum DeFi market conditions, while AUSD yield is tied to US Treasury rates, offering relative stability.
This diversifies Katana's revenue structure. When on-chain markets are volatile, off-chain yield provides a buffer; when on-chain yields are low, Treasury returns support the overall yield. This structure spans both the crypto market and traditional finance.
3. Locking Capital vs. Putting Capital to Work
As mentioned earlier, most existing cross-chain bridges choose to simply lock assets for a reason—security. When assets don't move, the system design remains simple, and the attack surface is limited. Most Layer 2 networks adopt this approach. While secure, the capital sits idle.
Katana takes the opposite stance. Activating idle assets introduces additional risk, and Katana is very transparent about this trade-off. Instead of avoiding risk, the network partners with established risk management experts in the DeFi space, including firms like Gauntlet and Steakhouse Financial.
Source: DefiLlama
Gauntlet and Steakhouse Financial are seasoned risk management firms in DeFi, with extensive experience setting parameters for major lending protocols and advising top DeFi projects. Their role is akin to professional asset managers 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 offers 100% security, so concerns about residual risk are valid.
However, Katana partners with top-tier risk managers and maintains a conservative vault architecture. An internal risk committee oversees operations. Additional safety measures include multiple protective mechanisms, such as liquidity buffers provided by Cork Protocol.
4. The DeFi Utopia Katana is Building
The current DeFi market suffers from liquidity fragmentation. Pools trading the same assets 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 bear higher costs.
Katana addresses this problem at a systemic level.
The Vault Bridge and Chain-owned Liquidity concentrate liquidity into core protocols. The result is improved trade execution, reduced slippage, and more stable borrowing rates. Most importantly, yield from idle assets on the Ethereum mainnet is layered on top of the base yield, increasing the overall APY.
Source: Morpho
Katana's incentive structure can also significantly reduce the real cost of borrowing at specific times, even creating negative rates depending on market conditions and reward programs. This is because yields from the Vault Bridge, CoL, and AUSD are all reinvested into core markets. It's important to note, however, that these are incentive-driven outcomes that vary with market conditions.
This is why, as of Q3 2025, over 95% of Katana's TVL is actively deployed in DeFi protocols. In contrast, most chains see capital utilization rates between only 50% and 70%. Ultimately, Katana is building a chain where capital never sleeps, a system that truly rewards actual usage.
Katana never sleeps.
