Introducing Bitcoin Collateral Vaults

Introducing Bitcoin Collateral Vaults

After five years of building in Bitcoin lending, we're here to make our biggest announcement yet.

Bitcoin Collateral Vaults.

Borrow stablecoins on any chain, backed by BTC collateral that stays on the Bitcoin chain and within your custody.

During DeFi summer, we were amongst the first users of wBTC on Aave. Yet, we quickly realised that this approach wouldn’t unlock the full potential of Bitcoin as the world’s most pristine collateral asset.

This kicked off 5 years of work.

We joined Trust Machines in 2021 to work under Stacks Founder Muneeb Ali to build the world’s first Bitcoin L2 with fully programmable smart contracts. We tinkered endlessly with Discreet Log Contracts (DLCs), FROST-enabled signer networks, and ended up spinning Zest Protocol out in 2023 with the backing of Tim Draper and Yzi Labs to build the largest Bitcoin lending protocol on a Bitcoin L2.

Running a live lending market for two years taught us things no whitepaper can. We watched risk parameters handle real volatility, built stress-tested liquidation flows that prevent bad debt, and built a market that Bitcoiners trust with over 800 BTC and counting.

Zest Protocol Stacks market will always be our home base. Though since the mid-2025, something started shifting on the Bitcoin main chain that we couldn't ignore: BitVM.

The BitVM moment

In early 2024, BitVM changed what was possible on Bitcoin. For the first time, arbitrary computations could be verified on the base layer without a consensus change.

Zero-knowledge proofs of smart contract state on external chains could be checked directly on Bitcoin. Over the course of 2025, on-chain challenge costs fell from over $14,000 with BitVM2 to sub-$100 with newer constructions.

In summer 2025, we saw the implication: BTC could finally serve as collateral in DeFi without ever leaving Bitcoin. We started building in stealth.

Bitcoin Collateral Vaults

A user locks BTC directly on Bitcoin in a self-custodial vault. The vault's spending conditions are tied to the state of a smart contract on the DeFi destination chain (e.g. Ethereum). And the user borrows stablecoins from the deepest liquidity pools in DeFi.

In the meantime, the BTC never leaves Bitcoin unless the position is liquidated, in which case the user would lose custody anyway. There is no wrapping, bridging or custodian involved.

The shipping plan

BitVM-verified Bitcoin Collateral Vaults are the endgame. However, BitVM is not production-ready today. Operator choreography is still maturing, proving stacks are stabilizing, and mainnet tooling does not yet exist.

At Zest Protocol, we are not waiting.

Zest Protocol ships Bitcoin Collateral Vaults in two phases.

Phase 1 uses pre-signed Bitcoin transactions that constrain where BTC can go. Phase 2 replaces the trust layer with full BitVM verification. Active positions from Phase 1 automatically move over from their original verification model towards BitVM verification..

Phase 1 exists to get the Bitcoin Collateral Vault infrastructure running on Bitcoin mainnet without being constrained by experimental verifier technology like BitVM or zero-knowledge proofs.

In our view, the core engineering challenge behind shipping Bitcoin Collateral Vaults is not the BitVM verifier itself, but rather the cross-chain plumbing: vault construction, UTXO management, spend path enforcement, liquidations, and the collateral lifecycle between Bitcoin and the destination chain.

All of this needs to be battle-tested with real positions and real capital before adding an experimental verification layer on top. Layering in BitVM or zero-knowledge verification on top of infrastructure that has not yet proven itself in production compounds risk unnecessarily.

What Zest Protocol Backers are saying

"Stacks was built so Bitcoin could finally serve as the foundation for a real on-chain financial system. Zest Protocol has been the proof of that thesis on Stacks. Zest team has a proven track record and experience of running a real BTC lending market. Bitcoin Collateral Vaults on L1 are an exciting new development and Zest is well positioned to be a market leader for Bitcoin Vaults."

— Muneeb Ali, Founder of Stacks

"Bitcoin is the most important asset of our generation. We backed Tycho and the Zest team because they understood years before anyone else that Bitcoin needed real lending infrastructure. They have already won on Bitcoin Layer 2s. Now they are taking it to Bitcoin L1, and they will win there too."

— Tim Draper, Founder, Draper Associates

"Bitcoin holders should not have to choose between liquidity and custody. Institutions have solved this through triparty arrangements and Bitcoin Collateral Vaults democratise that proven setup, on-chain and without intermediaries. We have a working mainnet prototype, and are accelerating towards deployment."

— Tycho Onnasch, CEO, Zest Protocol

What's next

We have a working mainnet prototype today. Bitcoin Collateral Vaults launch on Bitcoin mainnet soon, with stablecoin borrows on EVM chains.

Bitcoin holders should not have to choose between liquidity and custody. Soon, they won't have to.

For the full technical breakdown, check out the docs here.