Polygon Labs and crypto trading firm GSR on Monday launched a new, Ethereum-based blockchain with a focus on DeFi.
Dubbed Katana, it is designed to address two of the most pressing issues in the sector, according to executives at Polygon Labs and GSR: unsustainable yield fueled by token inflation and the siloing of digital assets across dozens of blockchains and hundreds of applications.
Tokens have been spread thin across myriad platforms, creating relatively inefficient markets despite crypto’s multi trillion-dollar global valuation.
“Every chain is built the opposite of what you would want for deep liquidity,” Marc Boiron, CEO of Polygon Labs, told DL News in a recent interview.
“You literally have 30 decentralised exchanges on a chain,” he added.
But his solution comes with a catch: unlike the highly competitive ecosystems of most general purpose blockchains, Katana will prioritise select financial applications.
It will also offer several incentives for users to deposit their crypto in those applications.
In doing so, it revives an initiative that caused an uproar among users of the Polygon POS blockchain last year.
In December, three organisations proposed depositing in the Morpho lending protocol about $1.3 billion worth of idle stablecoins languishing on the bridge that connects Polygon to Ethereum. While that would have yielded an estimated $70 million in annual interest, it was lambasted as gambling, however conservatively, with user funds and promptly withdrawn.
Boiron said the proposal was misunderstood and that it would face little to no opposition in a brand-new blockchain.
Katana lured more than $200 million in deposits prior to its Monday debut, according to the news release from the project.
‘Nobody’s worried’
Idle crypto ported to Katana from Ethereum will be automatically sent back to Ethereum to be deposited in low-risk lending-and-borrowing pools on Morpho, according to Boiron. Those pools will be managed by risk management firms Gauntlet and Stakehouse Financial.
Yield from those pools will be re-routed to Katana to boost yield doled out by its preferred financial applications.
This feature comes courtesy of a new protocol dubbed VaultBridge. At least 10 competing blockchains built atop Ethereum are considering integrating VaultBridge, Boiron said, though he declined to name those blockchains.
Katana isn’t Polygon’s attempt to revive the failed proposal from December, according to the executive, but the inverse: VaultBridge was developed for Katana, and eager third parties familiar with the technology wanted the feature to make its debut on Polygon POS.
Boiron attributed the proposal’s failure last year to the fact that it omitted key details, as well as competitors’ effort to discredit the initiative.
“Nobody’s worried about it on Katana, because as long as users know and opt into it, it’s their risk to take,” he said. “The yield is going to be more conservative than any option that’s available on Katana.”
VaultBridge is one of just several features that help boost yield on select financial applications on Katana.
Together, those features will give those applications an advantage over competitors that might otherwise siphon away users’ crypto.
Katana’s built-in decentralised exchange is a modified version of Sushi, a long-running decentralised exchange on Ethereum and dozens of other blockchains.
Its lending protocol is Morpho, a fast-growing upstart sporting user deposits totaling more than $6.5 billion as of Monday.
Katana will also privilege a memecoin launchpad and a decentralised exchange for perpetual futures, according to Boiron.
“There’s no point in Aave trying to come and deploy [on Katana] because they’re just going to lose,” Boiron said. “It’s too much money flowing through to Morpho, and it wouldn’t make sense for them to try. Same thing for Uniswap.”
Katana token
The blockchain itself will be managed by the nonprofit Katana Foundation, rather than tokenholders.
Katana is a so-called layer 2 blockchain, one that processes and batches transactions before sending them to Ethereum for final settlement. Layer 2 blockchains let users take advantage of Ethereum’s security while avoiding its notoriously high transaction fees.
Most layer 2 blockchains, such as Arbitrum and Optimism, are governed by ostensibly leaderless cooperatives that are made up of investors who hold the blockchains’ native tokens.
The Katana token, KAT, will not come with governance rights, according to Boiron.
“Governance tokens are disasters,” he said. “Whenever it looks smooth, it’s because somebody’s controlling what’s happening in a completely centralised way.”
Instead, Katana will accrue value through a complicated model that powers certain crypto protocols, such as Aerodrome.
“It’s an opinionated chain, and we’re not gonna fake that it’s decentralised,” Boiron said of Katana.
The Katana Foundation, Polygon, GSR, and crypto firm Conduit will make decisions for the blockchain via a nine-member committee.
A separate committee of 13 representatives from “aligned applications” will serve as a security council with power to veto changes or make changes in the event of an emergency, such as a hack.
Boiron declined to name committee members due to security concerns over multi-signature wallets.
Polygon Labs has already built a blockchain: the popular Polygon POS. Nevertheless, the Polygon Labs CEO doesn’t see Katana as a competitor.
That’s because every blockchain will have to specialise in order to succeed in the hyper-competitive crypto ecosystem, he said. As Polygon POS turns its focus to stablecoins and real-world assets, Katana can serve as an alternative for traders who want to do business on an Ethereum-based blockchain.
Moreover, they benefit from a shared architecture that simplifies moving crypto from one to the other.
“All these fintechs, all these institutions, are going to keep onboarding the POS and they’re going to offer payments and remittances to their users, and they’re going to see a boatload of stablecoins sitting there,” Boiron said.
“And they’re going to say, why don’t I offer some savings product to my users?” he added. “And that’s what Katana allows for.”
Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can reach him at [email protected].
