Bitcoin’s ecosystem has flourished in this bull market, with projects such as Layer2 and DeFi taking the lead. Among them, the Bitcoin lending DeFi project, in which the Binance Research Institute has invested, stands out. What makes it unique?
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Providing various income opportunities for Bitcoin holders has always been one of the industry’s explorations. In the big cycle of the crypto bull market, it seems inefficient to passively hold Bitcoin and wait for its price to rise.
Zest is a DeFi project specifically designed for Bitcoin and recently raised $3.5 million in seed funding, led by Tim Draper and with participation from Binance Labs. Tim Draper, a venture capital guru in Silicon Valley, has previously invested in well-known companies such as Baidu, Skype, and Hotmail, and has also participated in investments in Arkham, Coinbase, Gemini, Ledger, and Maker in Web3. It is worth mentioning that this is also Binance Labs’ first investment in the Stacks ecosystem. What are the unique features of Zest, a DeFi project based on Stacks, which is an L2 solution for Bitcoin?
Introduction to Zest
Zest Protocol is a Bitcoin lending protocol based on Stacks. In previous collateralized lending solutions for Bitcoin, users often had 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 was listed on Forbes’ “30 Under 30” list. Before founding Zest, he was a core contributor and developer for Stacks. He has also served as an executive at Trust Machines, a developer of Bitcoin ecosystem applications. TychoTycho’s impressive resume has garnered significant attention for Zest.
Execution Mechanism
Zest primarily utilizes the Stacks Layer 2 architecture, enabling native BTC to be transferred to Stacks and become sBTC (a BTC version supported 1:1 on Stacks, to be launched in October 2023). Users interact with their sBTC as if they were interacting with native BTC on the Bitcoin chain.
Although users’ sBTC is stored in the Zest pool, an equivalent amount of BTC is stored on the Bitcoin chain under the Stacks consensus mechanism’s threshold signature script.
Furthermore, on Zest, collateralized lending does not incur packaging fees, unlike wBTC, which charges partial transaction fees for packaging.
Here, we must mention Clarity on Stacks, a smart contract that allows users to interact with BTC by reading its state from the Bitcoin chain. Zest’s lending is based on clarity coding, with its design being inspired by Aave v3. However, since the sBTC hard fork on Stacks is still scheduled for mid-2022, its main functions are yet to be observed after the upgrade.
In the design of the Zest mechanism, two types of roles play important roles for borrowers: liquidity pool representatives and institutional borrowers.
Liquidity pool representatives are primarily responsible for managing the BTC lending pool on Zest. Each Bitcoin liquidity pool is managed by one liquidity pool representative. The representative negotiates loan terms with borrowers, conducts due diligence, and liquidates collateral in the event of default. The representative reviews the borrower’s reputation, expertise, and performance to assess loan terms.
Once the borrower and the liquidity pool representative agree on the interest rate and collateralization ratio, the liquidity pool representative will provide funds for the loan from the lending pool they manage. The pool representative is 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 representative’s permissions include creating Bitcoin pools to attract funds, approving or rejecting loans, evaluating borrowers, and managing balances in the pool. In other words, all pool representatives must be whitelisted before establishing a lending pool. When a user is an institutional borrower, Zest allows them to borrow BTC using their balance sheet.
Additionally, Zest has set a grace period for all borrowers. When the collateral value falls below the liquidation price, there is a 3-day grace period during which users can increase their collateral to avoid forced liquidation. Currently, users earn 1 point for every $1 worth of collateral per day. They can also earn points by inviting friends through referral links.
Last month, shortly after the deployment of the Zest mainnet, it was attacked by hackers. The attackers manipulated the value of collateral by repeatedly listing items in the collateral list, allowing them to withdraw STX far beyond their quota in 5 loan operations. The attackers stole a total of 324,000 STX, although all losses will be compensated by the Zest treasury, it still had a certain negative impact. Zest has reopened after undergoing security audits last week.
In the lending section, Zest has temporarily launched the Stacks market and will soon launch the BTC market. According to official data, it has already obtained a TVL (Total Value Locked) of over $10 million. With the upcoming sBTC hard fork upgrade, once market enthusiasm is reignited, Zest may experience a period of strong growth.