Building Sustainable L2 Liquidity: Overcoming Fragmentation & Deployment Challenges for Stablecoins

Hello. Um, we're getting into what I think is one of the most exciting topics uh of this cycle. Um, you know, like there there is a lot of of new networks trying to bootstrap and you know, not all of them are successful. Um, so I just want to kick it off with like an easy one. Um, what were the non-negotiables do you guys have when you started incubating Katana?

And specifically like what were the pitfalls you saw others doing? you were like like we're definitely not doing that. Yeah. I mean I think the most obvious one is like what we're doing that is I think strategically just completely different from how anyone else has approached DeFi on a chain in general which is the idea of having like a set of like core partners. So on Katana what is very unique is that you only have one lending protocol, you only have one spot deck, you only have one per deck, you will only have one memecoin launchpad.

Um this is done in a very permissionless way. Um and that's just done through various incentives. But this is like very different, right? Because if you just like imagine a world where like Binance was like, "Hey, I'm going to have a different order book in, you know, every single country. And by the way, I'm going to call one Binance.

I'm going to call one, you know, Binance 2 and one Binance 3." Like, it would be the most insane thing possible. except that's exactly what has been done on chains. Uh and so to me that was like the biggest like non-negotiable. Yeah.

I mean um I I think uh I think we we'll go into it later but I think I think from our side we we we sort of believe that opinionated chain will start taking more and more market share from general purpose chains particularly in in key narratives that need to be sold and DeFi being one of those where fragmentation is not necessarily a good thing uh concentration is a is a good thing and I think we'll go into that so that was probably one of the things that attracted us uh the most um with um uh with with uh katana and and the other part is um you know the sort of top down bottom up way of building things. I think that we have seen many successful uh uh protocols that have the bottom up uh uh process where they basically centralize all their potential growth around the core app and that's really what values it. You've seen that with Athena, you've seen that with hyperlquid. These are change which all its you know all its success is going to be synced to this super app versus Katana is much more of a top down uh um a top- down approach where we have a number of core apps um that will you know stack yield and and and stack uh liquidity uh and that's quite important to build more of a a a big chain ecosystem for D5. Those are probably the main attraction.

So um you know I I love the fact that the analogy is like not know a lot of the talks here were like like networks as nations. Um so uh the main the main the main um export of of katana nation would be would it be liquidity like like cuz because you you mentioned you know like these networks that are like app specific and like there is a single main value prop. Is liquidity going to be like the main value prop on Katana? I think of it as like two things. So, first like if if we just think of DeFi in general, like uh look, I love the crazy that we build in DeFi just as much as the next person, but like we build too much crazy just to build crazy Uh and when you actually talk to users about what do they really care about, it comes down to two things.

It's like I want deep liquidity and I want high yields. That's really it. There. Number three is like security basically every time. But that's like just baseline requirement and you have to say you cannot not say security.

It's like that oh yeah I I have to mention that. So just like like let me slot it in there. Yeah. Yeah. But I mean honestly given how lots of things have gone it's almost like for many teams you might need to mention it.

For us it's just always been like the baseline requirement. But yeah so it's like ultimately it comes down to liquidity and and yields because it it's all about just delivering to users what they actually want and that's the things they care about. Um, we've seen a lot of like specifically, you know, like liquidity and yield. We've seen a lot of networks just like I'm going to like shower people with yield and hope they show up. Um, what have you done differently like like how have you structured incentives differently around around bootstrapping katana?

Yeah. So, um, it's all about sustainability. So, like you can get deep liquidity actually that's pretty hard to do in an unsustainable way. you can get like high yields with just a shitload of tokens going out. Um the big thing that's different about Katana is the kind of leveraging like real yield sources, right?

So like we will have token emissions. There's token called cat like that'll be tons of fun. All of the core apps like morphone sushi as an example like give out tokens as emissions as well. But the kind of key distinguishing factor is like three sources of yield that you don't necessarily get on other chains. Like the first one is using a protocol that that Polygon built called VaultBridge which is basically like all deposits of USDC, USDT, ETH and BTC into the chain are deposited into Morpho Vaults on Ethereum.

Uh those assets are lent out and all of that yield goes right back into those core applications and flows through to the users. Right? If you're talking about a you know a billion dollars of TVL, that's $50 million around a year of of funds going just straight to users. Uh the second one is sequencer fees. Um so all the sequencer fees get recycled back to the users.

Um and you know that sequencer fees like vary, right? Like you see base that hit close to $100 million in sequencer fees and you see like most chains closer to like successful chains closer to like $20 million a year in sequencer fees. Um but if you even start out with like two three $5 million of sequencer fees, that starts adding up. Uh and then lastly um there's going to be a set of like uh users like institutions who are going to say like I don't want to take bridge risk at all. And so we have a stable coin that is native to it which is a Gora stable coin a USD and that is a kind of revenue sharing stable coin.

So we receive that revenue and we put that right back into these core applications that flows through to the users. So you ultimately have these three sources of yield all of which basically grow either with activity on the chain or they grow with more users coming to the chain and bringing kind of those assets. And that's something that what you should be able to see with time is as that grows then token emissions can actually diminish. You could keep them if you wanted to, but like they can diminish and most chains they can't diminish. Uh and so that's really how you keep like sustainably higher yields on the chain than you'd get anywhere else.

Um you mentioned the institutions. Um I imagine like bringing institutions on to an an L2 is it's it's a lot of what you at GCR has to do. uh um have to do like like help them, you know, like get on boarded and trust this network. Um what what are what are like the the challenges and trade-offs there? Uh Jacob, that's for you.

Is it for me? Yeah. Yeah. I mean, I I I I think I think it goes back to what Mark said before. one one is um you know capital efficiency is very very important for for for institutions in general I think that everyone can see that there are quite interesting yields there are app revenues there are sequence of fees there are real world ye yields that can be uh achieved um uh onchain and what's what's really attractive uh into a defy chain like katana is that you know these are not static yields that gives exactly the same, you know, these are like variable yield.

If you're talking about sort of how how it's working the nice thing with something like katana is that it it it stacks all these yields on top of it. So whenever something is printing, you will benefit from that general yield. The other thing is that you go into these protocols and you're trying to find where can I actually deploy a reason amount of money where I can do sort of operational due diligence and see where it goes in. there's core apps onto these on these chains. So it makes it much much easier um uh to navigate and and having those two things about you know one of the most beautiful thing with with with katana is that yields are stacked that's that's because one yield might go from you know at some points it's it's it's giving you 5% at some points it's giving you 3% at some point it's giving you uh 7% you might have to reroute everything you don't necessarily have to do that you know um on uh if basis yields are if basis are high, Bitwalt will be able to give you you know um uh uh yield on that if the u treasury yield is yielding high you will get that through uh agora sequence of feces comes back in you you you will receive it.

So those things I think is is is is very critical that no one is is really solving today and you can only do that by having a really opinionated opinionated chain and I I think I think that's why it's attractive to to to institutions. Yeah. I I think um you know having that like firm direction uh and to as you say like like a strong opinion on on how some components of the system have to work is is definitely like giving an edge in moving things quickly and like bootstrapping. Um but you know I come from argon you you mentioned the token um you know like like there there there is some uh potential need for like long-term alignment. I mean a lot of projects for example they interact with a market maker like earlier on like like how do you how do you ensure alignment across across the ecosystem on a on a long horizon right you you mentioned okay there are like three types of yield but you know in in every to to stick with the country example usually you have people that are like oh yeah like like there's going to be a subsidy just give it to my industry or to your like like you know how do you how do you how do you manage that like more long term?

Yeah. So um there's a few ways in which we we handle this, right? So I I think there's there's alignment with um users and then there's like alignment with like the applications, right? Um so like I think one of the nice things with the core applications that that's good from an alignment perspective is simply um they are so crucial to like this this environment that from their perspective it's like I I actually have the opportunity to have this chain as like my home to be successful, right? You look at that from like Sushi's perspective.

It's like um I don't actually need to like worry about these other dexes. All you're doing is competing against them on other chains. Within that chain, you're getting all the flow, right? So when a user goes and says like, "Hey, I'm going to use this lending protocol. I need more foe."

Um but then I want to go to a DEAX, their their only choice is is sushi, right? Um and so there's alignment in that sense. there's alignment from like a a token sense in in the way that it's structured in the sense that like for for sushi for example like we're implementing like a V33 model with them where actually the cat token is actually used for emissions and cat holders can actually earn revenue off of sushi itself. uh this will be like a generalized locker that will actually be able to be used across like multiple apps, right? And so now what you have is actually token holders from the chain actually earning revenue from the app itself, which is very unique.

Uh creates good alignment. And then the last thing I think is really important is like what we call uh like chain owned liquidity. Um and so general idea there is there'll be a portion of revenue that actually goes to buying liquidity uh on sushi in certain tokens. Now, this ends up creating great alignment with users, right? Because what will happen is that liquidity is going to stay in there at any point in time.

So, what happens most of the time is you're in like a bull market, tons of liquidity in these exchanges, uh, in these dexes, and what'll happen is then there's a a you know, some kind of pullback, and that liquidity gets pulled out of there, especially like when you're talking about any kind of like uh concentrated liquidity like within the key ranges where there's actually like the most risk. It's like where where funds actually get pulled out. Um with chain liquidity, we can actually just leave it there um at all points in time. So you have like this base baseline amount of liquidity uh at all times which is actually very favorable to users and that can be done in a way that's actually particularly favorable in the sense that like we won't for example take any fees on that. Uh and so all that actually just increases the fees for other LPs and so it's capital that's available in like good times and bad times uh and creates like great alignment with users.

Um just with that much focus on on liquidity and and market structure I imagine you guys had a big part of like that architecture um aside from like combining existing components in a in a new way in a new stackable way. uh uh Jacob, what's what's something else that you know Katana is uh doing uniquely in terms of like instruments available for participants in the market? Well, I mean, I I think that the real I mean, I'm getting into something that we we we probably touched upon, but it's it's kind of sort of rewriting the, you know, what we are trying to achieve. Even in crypto historically um more has always been better more more protocols you know uh more apps uh more stable coins more partnership uh which creates all these frag fragmentation on this this this is what general purpose blockchains was built for just you know build whatever you build whatever you want but from a trading perspective from a yield perspective from a defi perspective fragmentation is attacks on users It's it's it's a very high tax on users uh and on on on on LPs um not only for like the available liquidity that you can deploy but uh through slippage through complexity uh through navigation and I think uh that's really the key part that we're that that we're that we're solving here uh and the the the the the the second part which is which which Mark mentioned is that it's actually incentivize the chain incentivize people to be active. It rewards the behavior of participating with more liquidity uh uh and um and and and keeping liquidity uh on the chain which in say should sort of like help with this overall flywheel and and that's something that we haven't seen before and and I think we're we're very very excited about it.

I mean that's one thing that like just to add on to that right like I think the like when we actually talk about things uh like anything any measure at at like with respect to katana it's all based on like productive TVL this idea of like what TVL is actually used I we like literally do not care about TVL plainly like it's irrelevant I I say it all the time like and I I mean this like if I wanted to bring like $2 billion of TVL I could do it in the next month like I'm like like easily um it's just going to be like a bunch of assets that um frankly people don't want to borrow. They don't necessarily want to use um that's not like actually useful. Like what I want is a bunch of assets that people want to hold and want to actually actively use. Uh that's going to drive way more value for apps in the ecosystem, way more asset value for like the the actual assets active in the ecosystem. Uh and so uh productive TVL is the thing that matters.

like this TVL number is like completely useless. Yeah, we we've we've seen we've seen like people optimize for like a vanity high level metric and and to what you mentioned like like capital efficiency is something that matters a lot for people that come from like typical markets background and it's I I would say like capital efficiency is one of the things that we haven't really done well until now. Um so I mean Katana sounds awesome. um you know when if if teams want to get involved uh like like how can how can they do that now and in the future? Yeah.

Yeah. So um there's a there's so a few things I I'll say like very specifically like if you if you're like a spotex or a perex or a lending protocol like don't come to Katana. It'll be like a waste of your time and money. So like just don't do it. I like I don't want disappointed people.

Like that that's bad. But if you're anyone that's building on top of that or building around that, um, I think Katana is going to be like an ideal ecosystem for you. And so, um, come hit up, uh, anyone on on the team. We've got, uh, Justin over here, Omni over here, Alex over there. Uh, just just hit somebody up.

Uh, if not, Discord, Twitter, Telegram, the same usual stuff. you can find uh Katana or uh if you need anyone from Polygon or GSR team, just hit hit them up and they'll they'll find you somebody from from Katana. Yeah. From just as as a close like what what's a what's a financial you would love to see on Katana? Is it maybe insurance?

Is it like um like Dpack coverage? Is it options? Like like what's the if you have a request for startups? Um well well I mean yeah I I I definitely think that onchain options is something that I mean I've been saying it now for eight years and I don't think that options has really gotten gotten as far into crypto as they they should do. So so I will continue to say that for another 10 years until it's happened.

But with particular with katana what what what I would like to see which might be outside of whatever have is that you know we are seeing more and more more and more government trying to finding yield products and trying to find you know uh nonnative fiat uh um savings products outside of the US in developing country even mature countries that that these are like the all the fintech companies that you are seen starting and they are getting bigger and bigger and bigger and people are trusting them more and more and more. I would like to see with Katana and I think it's going to happen that they are going to look for yield for their clients which are using saving products on new fintech companies and they are going to source um they are going to source yield uh onchain and I think that's going to be massive and I think that it's very very important that we deliver a product where the UI can actually come from you know uh the DGEN world into the next billion users and and and and you know I'm pretty confident it's going to happen in the next in in the next couple of years as we're seeing all of these um scaling and and for that I would say everyone should be participating in Katana and and and and helping provide a very flourishing ecosystem that we will then go out and and and and and show to all uh these you know fintech companies and new users is trying to find saving saving yields and we should be proud about the saving products that we have created in in in DeFi. Nice. So, um, well, fellas, you heard it here. Katana is going to bring you the DeFi mullet in practice.

Thanks everyone. Thank you guys. Thank you. Thank you.