Polygon and GSR Launch Katana to Reinvent DeFi Yield Models

Polygon Labs, in partnership with crypto trading firm GSR, has introduced a new Ethereum-based Layer 2 blockchain named Katana. Designed specifically for decentralized finance (DeFi), Katana seeks to address persistent challenges in the crypto sector—namely unsustainable yield structures driven by token inflation and the dispersion of digital assets across disparate blockchains and protocols.

Executives from both organizations emphasized that despite crypto’s global market scale, the proliferation of decentralized exchanges and platforms has led to fragmented liquidity. Katana intends to resolve this by concentrating assets and incentives into select financial applications rather than encouraging open, competitive deployment across the ecosystem. This curated approach, they stated, allows for deeper liquidity, reduced inefficiencies, and a more structured yield framework.

In contrast to general-purpose blockchains that prioritize broad accessibility, Katana will favor specific financial tools and incentivize users to deposit their crypto assets within these curated environments.

Reintroducing a controversial concept with refinements

The blockchain’s approach revives a controversial proposal previously floated within the Polygon POS network. In late 2024, several organizations had suggested deploying idle stablecoins—then amounting to $1.3 billion—into the Morpho lending protocol to generate passive yield. Although this could have yielded around $70 million annually, the initiative faced backlash due to concerns over user fund safety and was quickly withdrawn.

Katana’s creators argue that the new blockchain is better suited to this model. They claim the original plan was misinterpreted and lacked necessary transparency. On Katana, they say, users will opt in knowingly, bearing their own risk. In preparation for the launch, the project secured more than $200 million in deposits, a figure that reflects early confidence in the platform’s redesigned structure.

VaultBridge and yield optimization

At the heart of Katana’s model is VaultBridge, a newly developed protocol that enables the redirection of idle crypto assets back to Ethereum. Once returned, these assets are deployed into conservative lending and borrowing pools on Morpho, managed by risk advisory firms such as Gauntlet and Stakehouse Financial. Yield generated in these pools is sent back to Katana and redistributed across its preferred financial applications.

Katana also incorporates several DeFi-focused features, including a customized version of the decentralized exchange Sushi, Morpho’s lending system, a memecoin launchpad, and a decentralized perpetuals exchange. Project leadership has signaled that major platforms such as Aave or Uniswap would struggle to compete within Katana’s tightly coordinated ecosystem due to the dominance of preselected protocols and capital concentration.

Governance without governance tokens

Unlike most Layer 2 chains governed by token-holding communities, Katana will be managed by the nonprofit Katana Foundation alongside stakeholders from Polygon, GSR, and Conduit. Governance decisions will rest with a nine-member steering committee, while a separate 13-member security council—drawn from affiliated applications—holds emergency powers such as protocol intervention in the event of hacks or exploits.

Notably, the Katana token (KAT) will not offer governance rights. The project’s leadership described governance tokens as problematic, claiming that behind-the-scenes centralized control often dictates outcomes regardless of decentralized appearances. Instead, Katana will use a value accrual model similar to protocols like Aerodrome, prioritizing operational transparency over governance optics.

Complementary role to Polygon POS

While some may view Katana as a rival to the existing Polygon POS chain, executives at Polygon Labs see the two as complementary. As Polygon POS shifts its focus toward supporting stablecoins and real-world asset applications, Katana will cater to traders and financial applications within the Ethereum ecosystem.

Both chains benefit from shared architecture that facilitates seamless asset transfers, allowing fintechs and institutional partners to develop diverse offerings—from payments and remittances on Polygon POS to yield-generating financial products on Katana.

Project leaders indicated that institutional adoption of POS-based solutions would likely prompt firms to explore savings or yield products, a demand Katana is purpose-built to meet. With its focused architecture, pre-vetted applications, and novel yield strategies, Katana positions itself as a purpose-driven blockchain optimized for DeFi’s next evolution.