Katana Blockchain Deep Dive: Solving Liquidity Fragmentation with ZK-Rollups

For a long time, liquidity and yield optimization have been problems that any DeFi project needs to solve in order to survive and attract users. Katana was introduced to address liquidity fragmentation and optimize yield, enabling users to earn yield even from simply bridging assets. Let’s take a deep dive to understand how Katana is solving this problem in order to become a comprehensive DeFi chain in the future.

What is Katana?

Katana is a Layer 2 blockchain using ZK rollup technology, built by the Katana Foundation and incubated by Polygon and GSR. Katana was created to reduce liquidity fragmentation and maximize yield by ensuring that all liquidity on Katana is absorbed by only one lending protocol (Morpho) and one spot DEX (SushiSwap).

Most dApps on today’s blockchains integrate with and rely on liquidity from multiple protocols. For example, ETH/USDC liquidity on Arbitrum is spread across Uniswap v3, SushiSwap, and Camelot. This leads to fragmented liquidity and can result in a worse user experience, with higher slippage, inconsistent pricing, and a less smooth trading experience. In addition, new projects often offer high yields through their native tokens to incentivize users to farm. However, this can lead to token inflation, and when yields drop, users may leave the project for better opportunities elsewhere. Katana is designed to address these issues.

After launching mainnet on July 1, 2025, Katana’s TVL quickly reached $165 million in just one day, and it previously reached an all-time high of over $600 million. Since then, TVL has declined. This is consistent with broader market conditions, where TVL has been trending down across many DeFi ecosystems.

What is Katana?

Katana has four core mechanisms, including Vault Bridge, sequencer fees, chain-owned liquidity, and AUSD.

Vault Bridge

Vault Bridge is a separate protocol built by the Polygon Labs AggLayer team, distinct from Katana itself. Normally, when users bridge assets such as ETH, USDC, or WBTC from Ethereum to another chain, the underlying assets are locked in the bridge contract and do not generate yield. Vault Bridge allows certain bridged assets (such as USDC, USDT, WETH, and WBTC) to be deployed into low risk, yield generating strategies via Morpho vaults on Ethereum (for example, Morpho vaults backed by US Treasury bills or other conservative lending positions).

After bridging, users on Katana receive vbTokens (i.e wrapped versions of the assets). These represent ownership of the underlying assets and the right to receive the yield generated by Vault Bridge, and they can be used as on-chain assets in Katana’s dApps. The yield generated from the assets on L1 is then transferred back to support Katana’s core dApps, such as SushiSwap and Morpho. This is a bridge model that can generate yield for the ecosystem, allowing bridged assets to both provide liquidity on Katana and generate additional yield from L1. From there, this mechanism can create a flywheel by encouraging users to engage with Katana’s core dApps and earn incremental yield, which can help attract more bridged capital into the Katana ecosystem over time.

Sequencer fees

On Layer 2 blockchains, transactions are batched and processed by a node called a sequencer, and then posted to Layer 1. This process generates sequencer fees. Sequencer fees can be considered a major source of revenue for Layer 2s.

Usually, sequencer fees help keep the L2 running by covering gas costs for posting data to Ethereum. Any leftover amount, or net fees, typically goes to the project’s treasury or chain operators. Some chains return part of this value to their communities, for example Optimism uses a portion to fund projects in the ecosystem.

Katana takes a different approach. Katana directs 100% of net sequencer fees into the Katana DeFi ecosystem. All of it goes back into the system. The goal is to increase liquidity and make it more durable by recycling net fees into user returns and permanent liquidity. These net sequencer fees are used in two ways.

• Higher yields: fees boost returns on core katana apps like morpho and sushi, giving active users better APRs.

• Chain-owned liquidity (CoL): fees build permanent liquidity reserves, stabilize markets, reduce volatility, and ensure deep liquidity across all market conditions.

Chain-owned liquidity

Chain-owned liquidity (CoL) is the foundation of sustainable liquidity on Katana. While traditional DeFi chains and apps rely heavily on short term incentives to attract liquidity provided by projects or individuals, and that liquidity is often withdrawn when yields decline, Katana takes liquidity into its own hands.

Initially, CoL starts small but gradually grows through user interactions within the Katana ecosystem, including bridging assets, deploying capital, and using core DeFi applications such as Morpho and SushiSwap. These actions generate sequencer fees. Katana uses sequencer fees along with a portion of revenue from core dApps to build a liquidity reserve that Katana directly owns. On Katana, because capital and returns are shared across the ecosystem, the growth of one dApp increases the shared liquidity base and supports other dApps as they grow.

AUSD

AUSD is Katana’s native stablecoin, developed by Agora, a project backed by two investment funds (Dragonfly and Paradigm). Similar to USDC and USDT, AUSD is fully collateralized by off chain US Treasury bills. USDC and USDT generate consistent interest income, but exclusively for the stablecoin issuers. In contrast, AUSD redirects the generated yield back into Katana’s DeFi ecosystem. Users who hold AUSD in DeFi pools receive additional AUSD tokens, fully collateralized by US Treasuries held off chain.

Users can obtain AUSD through two straightforward methods:

• Mint AUSD directly from Agora.

• Swap for AUSD on SushiSwap.

However, at the moment, AUSD’s market cap on Katana is still behind USDC and USDT, at $9.3 million. According to L2Beat, Katana is still a Stage 0 ZK rollup and will need to improve over time in order to progress to Stage 1 and Stage 2.

Conclusion

Overall, Katana presents a different approach compared to many current DeFi projects by leveraging its core mechanisms to create a flywheel for the entire ecosystem and directing on chain assets toward liquidity and yield optimization, which help attract users to the ecosystem. Concentrating activity in SushiSwap and Morpho improves efficiency but also increases dependency. In any case, evaluating how effective this model is will take time. If it can keep yields competitive without heavy inflation and maintain deep liquidity without constant incentives, it could become a strong blueprint for what a full-stack DeFi chain could look like in the next market cycle.