December 8, 2022
For Bitcoin to reach its full potential as a superior reserve asset, it must be equipped with many critical financial services in traditional markets. Furthermore, it has also to have the proper infrastructure for deep liquidity and productivity (a.k.a, yield).
As we saw after the previous bull market, some centralized finance (CeFi) critical services for Bitcoin yield had overstepped the boundaries of practicality.
Ultimately, these centralized lending products stretched funds beyond their capabilities, provided unsustainable yield rates, neglected looming risks, and the impending collapse of those crypto economics came to fruition.
There is a crucial necessity for the future of Bitcoin capital markets. However, its infrastructure must stay true to Bitcoin and be decentralized, trustworthy, and sustainable.
In this article, we will aim to explain Bitcoin yield, CeFi vs. DeFi yield on Bitcoin, and Zest Protocol’s unique approach to growing the Bitcoin economy.
Can You Earn Yield On Bitcoin?
First and foremost, yes, you can earn a yield on your Bitcoin. Bitcoin yield can be generated by using a platform or protocol that redistributes your funds to another party in the form of a loan. The borrower of that loan then makes set interest payments, given back to you as yield.
How to Earn Yield On Bitcoin
There are two distinct types of financial services to choose from to earn a yield on Bitcoin:
1. Centralized Finance (CeFi)
CeFi is the infrastructure for cryptocurrency that is governed by a central entity. CeFi organizations act as intermediaries between institutional borrowers and crypto assets and capital markets.
Pros of CeFi Bitcoin Yield
Ease of use
Cryptocurrency assets and financial services are easily accessible for retail and institutional investors with CeFi.
Tracking crypto transactions and organizing subsequent documentation is more convenient when using CeFi platforms. This is especially true when filing taxes and creating other legal documents.
Cons of CeFi Bitcoin Yield
Centralization of funds
Bitcoin CeFi is made up of a few powerful organizations. If centralized yield products were to control most of Bitcoin’s capital markets, this concentration would pose a significant threat to the entire ecosystem.
Another shortcoming of CeFi is the lack of digital asset ownership. In CeFi, investors are forced to turn over their funds to access yield. These organizations control where and how those funds are put to work, often with little to no transparency for the investor. This comes down to you trusting the platform to securely and responsibly redistribute your Bitcoin. As we witnessed recently, this is a major concern for every investor when utilizing CeFi platforms.
2. Decentralized Finance (DeFi)
DeFi is a term used to describe financial applications and services that do not require mediation by a third party. Rather than going through a bank or central company, users rely on blockchain technology to moderate, verify, and complete transactions.
Pros of DeFi Bitcoin Yield
Decentralization is the foundation of blockchain and cryptocurrency. At its core, decentralization enables permissionless, borderless, and immutable transactions. These defining attributes allow crypto (and its users) to operate independently from CeFi, as well as banks and other legacy corporations in TradFi.
DeFi yield provides more transparency in comparison to its CeFi counterpart.
In CeFi, the rules set forth by a central entity for yield and custody can have exceptions. This can transpire in a number of rare but significant occurrences such as account freezes, regulatory changes, or bankruptcies.
With the Zest DeFi Protocol, the rules of custody are absolute. Each smart contract clearly outlines its circumstances, with no exceptions. Additionally, all the code is publicly auditable for anyone to review.
Cons of DeFi Bitcoin Yield
Onboarding into Bitcoin and Bitcoin DeFi can be time-consuming, as there are more steps to getting started with Bitcoin in DeFi than CeFi. It will also require research on your behalf to find trustworthy, blockchain-based applications.
Without the intermediary, DeFi requires the user to take full accountability of transactions and management of funds.
Counterparty Risk and Smart Contract Risk
Varying degrees of trust and risk exist in all financial transactions. In cryptocurrency, CeFi and DeFi pose their own risks.
What is counterparty risk?
Counterparty risk is the probability of one party not meeting its obligations in a financial commitment. An example of counterparty risk in CeFi is when a user takes out a crypto loan from a platform. The CeFi platform takes on the risk of a user not repaying the loan. Conversely, risk can apply to the user. This can play out when a user holds funds in a CeFi wallet. The user accepts the risk of the CeFi platform becoming insolvent and limiting access to funds.
What is smart contract risk?
Smart contract risk is the probability of a protocol experiencing coding bugs or security vulnerabilities that could cause a disruption. Smart contracts essentially assume the counterparty role in DeFi. Agreements between parties are digitally encoded and are programmed to execute themselves at a predetermined time. This certainty eliminates many of the points of risk seen in CeFi. Therefore, the integrity and security of smart contracts become critical components of DeFi risk.
In the perfect situation, smart contracts will always have the advantage. Unlike counterparty risk, smart contract risk slowly decreases over time. As contracts become more widely executed and put to the test, the risk scales down to near zero.
What makes the Zest Protocol unique for Bitcoin Yield?
Zest Protocol is different from any other Bitcoin DeFi platform. From its inception, Zest has sought to become the most trusted and durable on-chain Bitcoin capital market.
Here are some of the characteristics that make Zest Protocol the best solution for Bitcoin productivity.
Zest Protocol operates on smart contracts that are secured by the Bitcoin blockchain itself. Unlike other Bitcoin yield products, Zest never lets your BTC leave the Bitcoin chain and does not require the user to wrap their own Bitcoin. Instead, the protocol manages the entire wrapping and escrow process. Zest’s smart contract layer, Stacks, has native read access to Bitcoin state, which makes it possible to manage the entire wrapping and escrow process without the need of a central entity.
Zest’s smart contracts are completely viewable to the public. The protocol’s code is shared freely to maximize transparency with all stakeholders.
Sustainable yield rates
Zest Protocol produces reliable yield by attracting the most credit-worthy institutional borrowers in crypto. Borrowers undergo a rigorous approval process before receiving a Bitcoin loan and hold the loan directly against their balance sheet. These loans are distributed by pool delegates, who are credit experts who manage Zest liquidity pools.
Zest Protocol trades-off counterparty risk of CeFi lending for smart contract risk. Zest addresses smart contract risk in three ways:
1. Two smart contract security audits. Zest Protocol has received audits from leading cybersecurity firms.
2. The use of Clarity smart contracts instead of Solidity smart contracts. Clarity is a programming language designed by scientists from Princeton and MIT in response to the many hacks of Solidity smart contracts. Clarity trades off some of Solidity’s expressiveness for safety, enabling developers to build dApps with the safety requirements of financial use cases in mind.
3. A steady rollout pace. Zest Protocol won’t allow liquidity providers to deposit large amounts of Bitcoin into freshly audited contracts at once. Each pool will be sustainably grown to capacity until the smart contracts are fully battle-tested.
Earn Bitcoin Yield with Zest Protocol
Zest Protocol is solving the deficiencies and dependencies of CeFi with on-chain, sustainable yield. Moreover, Zest enhances existing Bitcoin DeFi with innovative smart contract technology. With Zest, you are fully in charge of your investments.
To start earning Bitcoin yield with Zest Protocol, you first choose a liquidity pool with a strategy and yield that aligns with your goals. Zest then routes your Bitcoin to trustworthy institutional borrowers, vetted by pool delegates. Over time, you will receive zesty, periodic reward payments paid out in Bitcoin. When you choose to withdraw, your Bitcoin will be readily accessible upon the rules of the smart contracts, rather than the ambiguous and uncertain processes in CeFi.
Powered by Stacks, Zest Protocol eliminates the reliance on a middle-man, enabling trustless BTC rewards that are ultimately secured by the Bitcoin blockchain.