what is productive TVL?
understanding TVL in crypto
total value locked (TVL) has long been a go-to metric in crypto and defi.
it has been used as a way of quickly showcasing the sum of all assets on a specific blockchain or in a defi protocol. but TVL as a metric has critical flaws, particularly in capturing accurate economic health and activity for chains and defi protocols. it can mislead by including idle assets that don't contribute to meaningful economic activity or growth. high TVL might look impressive, but it doesn't necessarily reflect a vibrant or productive defi ecosystem.
katana addresses these flaws by focusing on a more nuanced view: distinguishing between chain TVL, productive TVL, and chain-aligned TVL.
the basics: what is TVL?
TVL measures the total value of assets bridged onto a blockchain or deposited into defi smart contracts, typically measured in USD. initially popularized during the defi boom in 2020-2022, TVL became a shorthand metric for a project's trust, liquidity depth, and overall popularity.
TVL for chains vs. defi protocols
chain TVL: all assets present on a blockchain, including idle funds just sitting in wallets. it's a broader metric not necessarily indicative of productive economic activity happening on that chain.
defi protocol TVL: all assets specifically deposited in apps like lending protocols (morpho) or decentralized exchanges (sushi). often relied on to indicate user confidence, a sort of social signaling, and available liquidity for defi users in that protocol.
the rise of productive TVL
katana zeroes in on productive TVL over chain TVL. productive TVL is the sum of all assets that are actively deployed in defi protocols, like morpho lending markets, sushi DEX liquidity pools, and yearn strategy vaults. it does not reflect idle assets sitting in wallets.
productive TVL cuts through the noise to show which assets are truly contributing to economic activity on the chain.
think about it this way: L2beat tracks ‘chain TVL’ while defillama tracks ‘productive TVL’.
it's a given that chain TVL will always be higher than productive TVL. it's just not realistic to think every onchain asset will be used in defi. but katana’s goal is to keep the ratio of productive TVL to chain TVL as close to 1:1 as possible.
a defi ecosystem's health can be gauged by its productive/chain TVL ratio; the closer this ratio is to 1, the healthier the ecosystem.
katana prioritizes productive TVL in three key ways:
on ethereum through agglayer’s vaultbridge
on katana by boosting the yield in defi liquidity pools through various fee and yield generating mechanisms to encourage the use of core defi apps and assets, and
through deploying chain-owned liquidity (CoL) into core defi apps on katana
productive TVL on ethereum with vaultbridge
in typical L2 bridging infrastructure, assets held in a bridge’s escrow smart contracts on ethereum are idle and unutilized. this creates capital inefficiency, as the assets do nothing except to wait for a user to bridge back to claim those assets on ethereum.
katana creates productive TVL on ethereum by taking specific assets in vaultbridge (ETH, WBTC, USDT, and USDC) to supply funds in morpho’s lending markets on ethereum to generate yield. not only does this better align katana with the broader ethereum L1 defi ecosystem, but it generates yield for the chain that is used by the katana foundation to boost rewards “in-kind” to core app defi liquidity pools on katana.
productive TVL on katana with incentives and chain-owned liquidity
boosting yield in defi pools: incentivizing users to deploy their assets into a concentrated set of core defi applications. katana uses real incentives from vaultbridge, AUSD treasuries, fees earned from chain-owned liquidity, and KAT emissions to encourage users to actively deploy their assets into core defi apps like morpho and sushi.
chain-owned liquidity (CoL): katana deploys CoL, earned from sequencer fees, into core apps like sushi and morpho. this deepens liquidity and improves the overall user experience for defi users on katana.
unlike mercenary capital, CoL is stable, reduces slippage on DEX trades, and ensures more predictable borrow rates.
LP rewards earned from deployed CoL either (1) compound for deeper CoL, or (2) boost yields for users in core defi apps, strengthening the chain's economic engine over time based on the long-term needs of the katana defi ecosystem.
limitations of productive TVL as a metric
even productive TVL as a metric has its limitations. while its a much better metric than ‘chain TVL’ for determining the health of a defi ecosystem, there are factors to consider:
idle assets: a lending protocol may show high TVL, but if few are borrowing, the capital effectively sits idle, earning minimal revenue for depositors.
out-of-range DEX liquidity: in v3 DEXs, if liquidity is deposited outside the active trading range, it earns no fees and provides limited trading benefits for users, inflating productive TVL metrics without providing true value to the defi ecosystem.
inefficient DEX pools: stablecoin pairs on full-range v2 DEXes leaves too much liquidity unused in the pool, diluting the effective usefulness of that liquidity for users and the economic efficiency of that liquidity for the LPs. uniswap’s own docs note that in the old v2 pools, only about 0.5% of the liquidity was actually used for trading, meaning 99.5% of the liquidity was effectively idle at any given time.
loans in lending protocols: when borrowing, a user must first post assets for collateral. that collateral is being productive, as it enables the user’s ability to borrow. but the loan, should that be considered ‘productive TVL’? the loan is providing revenue for the depositors, but the proceeds from that loan may or may not be used in defi protocols after it is borrowed.
mercenary capital: short-term yield farming can temporarily inflate TVL, masking sustainable long-term activity and actual product market fit of defi protocols.
its time to go a step further.
introducing chain-aligned TVL (CAT)
katana is collaborating with core apps and core asset issuers to focus on a more robust metric for evaluating the health and efficiency of katana’s defi ecosystem with chain-aligned TVL (CAT), moving beyond just productive TVL.
CAT measures the subset of productive assets and protocols that directly contribute value back efficiently to the chain's ecosystem or the chain itself. CAT emphasizes TVL throughout the ecosystem that is both aligned and efficient, promoting economic activities that directly support the chain's sustainability and expansion.
characteristics of chain-aligned TVL:
native and enshrined assets deployed in defi protocols: for katana specifically, assets like AUSD from agora, bvUSD & sbvUSD from bitvault, uTokens from universal, jitoSOL from jito, LBTC & BTCK from lombard, weETH from etherfi, and vbTokens from agglayer’s vaultbridge.
assets in core defi protocols: protocols that explicitly share generated revenue with the chain and its users, enhancing economic alignment and sustainability, like agora, morpho, kensei, and sushi on katana.
efficient productive TVL: assets in DEX LPs that are within specific trading ranges that provide efficient liquidity depth and volume, and supplied assets in lending markets that have strong utilization ratios and active loan generation.
katana’s approach: maximizing CAT and productive TVL
katana positions itself uniquely by aligning productive TVL with chain-aligned incentives, thus creating a robust economic model:
chain-owned liquidity (CoL): katana actively manages and deploys liquidity derived from sequencer fees to strategically support economic activities onchain that maximize for the long-term health of the katana defi ecosystem.
vaultbridge: katana encourages users to be productive with their assets on katana. specific bridged assets are deployed into low-risk yield-generating strategies on ethereum via vaultbridge, that yield is periodically harvested by the katana foundation to boost yield in defi pools on katana. users with productive assets in defi get rewarded with these vaultbridge rewards, assets sitting idle in wallets on katana do not.
core defi applications: katana prioritizes the benefits of CoL and vaultbridge boosted yields to a select number of defi pools in core defi applications (morpho, sushi). this maximizes the efficiency of the chain's productive TVL to make it more chain-aligned and removes the guess work for users on where to find the best liquidity and yield.
why katana’s model matters
katana's economic structure directly addresses the shortcomings of traditional TVL metrics by incentivizing productive, sustainable, and economically beneficial activities. this alignment offers:
improved user experience: deeper liquidity and efficient capital usage reduces slippage, stabilizes borrow rates, and creates more economic opportunities.
economic stability: revenue from aligned economic activities provides long-term incentives rather than short-lived token emissions. additionally, CoL provides assurances that even when the market conditions get rocky, there will always be a base layer of liquidity in katana’s core defi applications
active ecosystem: encouraging dynamic economic interactions rather than passive holding ensures continuous network growth.
while traditional TVL serves as a basic indicator, and its not going away anytime soon, katana’s introduction of productive and chain-aligned TVL provides a far more accurate, sustainable, and economically meaningful measure of a blockchain’s health and long-term growth potential.
by incentivizing active participation and aligning stakeholders’ interests, katana is here to redefine defi’s economic landscape, creating a vibrant, resilient, and genuinely productive ecosystem. stop sleeping on your bags.
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