What is Zest Protocol, a Bitcoin lending protocol based on Stacks? How will it unlock the potential of a trillion-dollar DeFi market for Bitcoin?
Written by 1912212.eth, Foresight News
Finding ways to generate income for Bitcoin holders has always been a focus of the industry. In the bull market of cryptocurrencies, it seems inefficient to passively hold Bitcoin and wait for its price to rise.
Zest is a DeFi project specifically designed for Bitcoin and has recently received a $3.5 million seed funding round led by Tim Draper, with participation from Binance Labs and others. Tim Draper, a Silicon Valley venture capital legend, has invested in well-known companies such as Baidu, Skype, and Hotmail, and has also invested in Web3 projects such as Arkham, Coinbase, Gemini, Ledger, and Maker. It is worth mentioning that this is also Binance Labs’ first investment in the Stacks ecosystem. What are the characteristics of Zest, the DeFi project based on Stacks, which is the Layer 2 solution for Bitcoin?
Introduction to Zest
Zest Protocol is a Bitcoin lending protocol based on Stacks. In traditional collateralized lending solutions for Bitcoin, users often need to trust exchanges or custodians of wBTC. Zest reduces this counterparty risk by transparently holding capital and issuing loans on-chain. Bitcoin collateral users can view or transfer funds at any time without any third-party trust risk.
Zest Founder TychoTycho graduated from the University of Oxford and has been listed on Forbes’ 30 Under 30 list. Before founding Zest, he was a core contributor and developer of Stacks. He has also served as an executive at Trust Machinese, a Bitcoin ecosystem application developer. TychoTycho’s impressive background has attracted considerable attention to Zest.
Operating Mechanism
Zest primarily utilizes the second layer architecture of Stacks, allowing native BTC to be transferred to Stacks as sBTC (BTC version supported at a 1:1 ratio on Stacks). Users interact with the native BTC on the Bitcoin chain.
Although users’ sBTC is stored in the Zest pool, an equal amount of BTC is saved in the Bitcoin chain under the Stacks consensus mechanism threshold signature script.
Furthermore, Zest does not charge wrapping fees for collateralized lending, unlike wBTC, which charges a partial fee for wrapping.
It is worth mentioning Clarity on Stacks, a smart contract that allows users to interact with BTC by reading its status from the Bitcoin chain. Zest’s lending is based on Clarity and its design is inspired by Aave v3. However, due to the hard fork of Stacks sBTC still being scheduled for the middle of this year, its main functions can only be observed after the upgrade.
In the design of the Zest mechanism, two roles play important roles: liquidity pool representatives and institutional borrowers.
Liquidity pool representatives primarily manage the lending pool for BTC on Zest. Each Bitcoin liquidity pool is managed by a liquidity pool representative. The representative is responsible for negotiating loan terms with borrowers, conducting due diligence, and liquidating collateral in the event of default. The representative assesses the borrower’s reputation, expertise, and performance to evaluate loan terms.
Once the borrower and the liquidity pool representative agree on the interest rate and collateralization ratio, the representative will provide funds for the loan from the pool they manage. The representatives are appointed by the Zest Protocol DAO contract, and if their power is abused, the Zest Protocol DAO contract can freeze the pool and withdraw the loan.
The authority of the liquidity pool representative includes creating Bitcoin pools to attract funds, approving or rejecting loans, evaluating borrowers, and managing balances in the pool. In other words, all representatives must be whitelisted before creating a lending pool.
When a user is an institutional borrower, Zest allows them to borrow BTC using their balance sheet.
In addition, Zest has specifically set a grace period for all borrowers. When the collateral value falls below the liquidation price, there is a 3-day grace period. During this period, users can add collateral to avoid forced liquidation.
Currently, Zest has launched the Stacks market on its lending platform and will soon launch the BTC market. According to official data, it has already obtained over $10 million in Total Value Locked (TVL). With the arrival of the sBTC hard fork upgrade, once the market enthusiasm is reignited, Zest may experience a period of strong growth.
Tags:
Arkham
Binance Labs
Coinbase
DeFi
Gemini
Ledger
sBTC
Stacks
Zest
Bitcoin
