Meet Zest: Bitcoin’s First On-Chain Capital Market

We’re excited to announce the official launch of Zest Protocol’s testnet! Beginning 20th October 2022, users can start testing for earning a yield on their Bitcoin with Zest. In this introductory blog, we will discuss Bitcoin capital markets, what Zest is, and how Zest works. Let’s get into it!

4

minute read

Nov 17, 2022

Zest Protocol

We’re excited to announce the official launch of Zest Protocol’s testnet! Beginning 20th October 2022, users can start testing for earning a yield on their Bitcoin with Zest. In this introductory blog, we will discuss Bitcoin capital markets, what Zest is, and how Zest works. Let’s get into it!

The Current State of Bitcoin Capital Markets

Right now, Bitcoin is an unproductive asset — what that means is a majority of BTC remains locked away in cold storage. For Bitcoin to emerge as a superior global reserve asset, it must have stable, secure, and decentralized means of being productive.

Right now, there are two options in Bitcoin capital markets

  1. Centralized custodial Bitcoin lending platforms.
  2. Wrapped Bitcoin lending products that are not ultimately secured by the Bitcoin blockchain.

These means of lending have inherent flaws that are in direct contradiction to Bitcoin’s purpose of security, transparency, and decentralization.

Most notably, they present two concerning factors for Bitcoin capital markets:

1. Custody Risk -You must send your Bitcoin funds to a centralized entity  

2. Counterparty risk - You must also rely on a central entity to responsibly manage your Bitcoin.

With innovative breakthroughs in blockchain technology and Bitcoin development, Zest has created an improved solution for lending and borrowing Bitcoin.

What Is Zest?

Zest is a decentralized, on-chain crypto capital market built on top of Bitcoin.

With Zest, users can lend BTC to earn sustainable yield on their BTC or borrow BTC through undercollateralized loans - all while directly interacting with the Bitcoin blockchain. Zest allows Bitcoin holders to experience true DeFi functionality that exists on other networks like Ethereum and Solana.

What makes Zest’s protocol unique

There are a few critical attributes that separate Zest from other Bitcoin lending platforms:

Fully on-chain - Zest utilizes smart contracts to 1) eliminate the need for a centralized intermediary and 2) significantly reduce custody risk.

Sustainable yield - Zest’s smart contract automation generates the highest, most reliable native BTC yield of any platform. 

Open source - Zest provides full transparency into its smart contracts.

Audited - Zest’s smart contracts have obtained comprehensive examinations from leading cybersecurity firms. View CoinFabrik’s Zest Audit.

How Does Zest Work?

Let’s discuss how Zest makes Bitcoin lending and borrowing possible.

Zest enables Bitcoin liquidity providers to earn Bitcoin yield through professionally managed lending pools. For borrowers, Zest offers on-chain Bitcoin loans directly against their balance sheet. These loans are arranged by pool delegates, who are responsible for managing their pool’s credit-worthy borrowers, pool balance, lending strategies, and liquidations.

Technical Overview

So, how does Zest bring DeFi to Bitcoin?

Zest Protocol is programmed with Stacks - a Bitcoin programming layer that enables smart contracts and decentralized applications on Bitcoin.

Through its own Proof-of-Transfer (PoX) consensus mechanism and smart contract language, Clarity, Stacks is able to read Bitcoin-state directly from the Bitcoin blockchain.

In addition to read access, Zest leverages the fact that Stacks and Bitcoin blocks are synchronized.

With Zest, transactions happen as follows:

  1. Liquidity providers send BTC to a Hash Timelock Contract on the Bitcoin blockchain
  2. Borrowers drawdown borrowed BTC to their Bitcoin address.

The escrow process happens through Stacks, and Zest’s smart contracts take care of the rest!

As you may know, Stacks makes no modifications to Bitcoin, but instead uses it as a base layer. All Stacks transactions ultimately settle on Bitcoin, which ensures the history, authenticity, and security of Stacks blocks.

Learn more about Clarity and Zest’s smart contracts.

Who Is Zest For?

Everyone! The Zest platform has three main audiences:

  1. Liquidity providers — you!

Liquidity providers put Bitcoin into a Zest Liquidity Pool in order to fund loans and earn yield paid out in Bitcoin.

  1. Institutions

Market makers, trading companies, exchanges, OTC desks, and other crypto-native organizations can either lend their Bitcoin or take out Bitcoin loans.

  1. Credit Experts

Credit industry professionals can apply to become a Zest Pool Delegate.

What Can You Do With Zest?

Earn a Yield

Zest liquidity providers generate Bitcoin yield through professionally-managed lending pools. Users start by choosing a pool to provide liquidity to. Once supplied, you can start collecting periodic reward payments in Bitcoin from the pool, and reclaim your Bitcoin back when you are ready to withdraw.

Borrow Bitcoin

Once whitelisted, borrowers can request a loan from a pool delegate. When a delegate approves, borrowers will be able to withdraw the funds for a fixed term, at a fixed rate, and at a fixed collateralization level. 

Manage a Liquidity Pool

Once approved, pool delegates start by creating a profile for their liquidity pool. This includes providing information such as their background, strategy, and target yield. Pool delegates can review loan requests from borrowers, and initiate conversations on terms and due diligence requirements.

Once an agreement is reached between borrower and pool delegate, the borrower will create the on-chain loan request and the pool delegate will be able to approve a transfer of Bitcoin funds from their liquidity pool.

Pool delegates earn reward payments paid out in BTC as the balance in their pool grows and as borrowers repay their loans.

Start Testing with Zest Today!

The Zest team is excited to soon introduce a new DeFi application to help grow the Bitcoin economy. With the first delegate pool live on testnet, users can test providing liquidity on Zest right now!

Are you an institution looking for orange liquidity or zesty yields with Bitcoin? We’re exploring partnership opportunities with lenders, borrowers, and pool delegates now. Contact us here!

Connect with Zest on social media!

Twitter: @ZestProtocol

Discord: https://discord.com/invite/5HhT77Nbqy 

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Written by
Zest Protocol
October 19, 2022
@ZestProtocol
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