Company:Zest Protocol
Founders:Tycho Onnasch, Emil Erkkola, Fernando Foy
Participation:Seed
What is Zest Protocol?
The Zest Protocol represents a pioneering leap in decentralized finance, aiming to unlock the latent potential of Bitcoin by creating a vibrant lending and borrowing ecosystem. By enabling users to lend their BTC holdings and earn yields while institutional borrowers gain access to liquidity, the protocol transforms Bitcoin from a store of value into a productive asset.
Why we invested?
Bitcoin still remains the oldest and most immutable Blockchain network with over $500B of liquidity on the network and Zest Protocol is aiming to tap into this idle liquidity by enabling the Bitcoin holders on the Bitcoin Network to lend their BTC and make a yield on it while also allowing them to borrow against their deposited BTC which was impossible before or included other networks or included centralized venues.
Team
The team comes from a deep technical background in the Bitcoin ecosystem with years of experience in Bitcoin and related technologies.
Audit
Zest Protocol is fully audited by tier-1 auditing firms Least Authority and Coin Fabrik which has a record of auditing the biggest and the best in the space including Stacks, Protocol Labs, Mina, Algorand, Web3 Foundation, Metamask, and many more. Apart from Audits, Zest also has a bug bounty on Immunefi to further boost its security efforts towards the protocol.
Detailed audits can be found here: Audit 1 | Audit 2
Detailed audits can be found here: Audit 1 | Audit 2
Challenges in the current landscape
- Counterparty Risk in Conventional Solutions:
Existing Bitcoin lending options introduce a substantial level of risk due to the reliance on third-party intermediaries. When lending or borrowing BTC, individuals are compelled to entrust their assets to these intermediaries, relinquishing control and transparency over the recipients of their lent BTC. This lack of visibility inhibits the productive use of Bitcoin and contributes to a significant portion of BTC remaining idle in cold storage.
- Impaired Bitcoin Economy Growth:
The prevalence of counterparty risk in centralized Bitcoin lending solutions came into sharp focus in 2022 when various platforms directed a substantial portion of their assets to insolvent hedge funds. The absence of transparency in the crypto lending sphere meant users remained unaware of their exposure to cascading defaults, eroding trust in centralized entities. Consequently, a mass exodus of Bitcoin from these platforms occurred, leading to the collapse of the nascent Bitcoin capital market.
- Bitcoin Capital Markets Stagnation:
The adverse consequences of the credit squeeze reverberated across the Bitcoin economy, depriving even the most creditworthy participants of access to Bitcoin capital. This shortage affected market-makers, impeding their ability to provide liquidity on exchanges, and compelled miners to divest part of their BTC holdings. The resultant decline in BTC price to $16k underscored the paramount importance of vibrant Bitcoin capital markets.
- Essential Role of Borrowing and Lending in the Bitcoin Economy:
Like any thriving economy, the Bitcoin ecosystem necessitates active borrowing and lending to foster growth and vitality. Bitcoin holders seek avenues to access liquidity without the necessity of selling their BTC holdings. Market makers require credit to sustain deep liquidity on exchanges, while miners rely on credit to bolster their hash power and safeguard wealth. For Bitcoin to ascend to the status of a global reserve asset, its presence in the world's most liquid markets is indispensable. Moreover, companies exploring Bitcoin for payments need assurance of a global Bitcoin credit market to support borrowing against future earnings, aligning with fundamental principles of corporate finance.
- Crucial Foundation for Bitcoin's Expansion::
The absence of a robust and resilient capital market poses a significant impediment to Bitcoin's progression towards serving billions of users. To realize its potential as a transformative global asset, Bitcoin must address these challenges and cultivate an environment where borrowing and lending thrive, creating a self-sustaining ecosystem that bolsters liquidity, stability, and growth.
Zest Protocol’s solution and Product offering
- On-Chain Bitcoin Capital Market:
Addressing the concerns of counterparty risk and lack of transparency, the ideal solution emerges in the form of an on-chain Bitcoin capital market, fortified by secure smart contracts embedded within the Bitcoin blockchain. This innovative approach gains embodiment through the Zest Protocol.
- Enhanced Counterparty Risk Management:
Zest Protocol fundamentally mitigates counterparty risk by conducting lending operations and capital allocation on the blockchain through smart contracts. This transparent execution ensures that lending and borrowing transactions occur on-chain, reducing reliance on intermediaries and eliminating opacity associated with unaudited balance sheets
- Transparency and Accessibility:
The cornerstone of Zest Protocol lies in its utilization of smart contracts, providing unparalleled transparency and accessibility. The pooled funds are governed by these contracts, allowing anyone to inspect the capital pool status at any given moment. The open-source nature of the smart contract code offers further assurance of the protocol's integrity and operation.
- Two Distinct Pool Types:
Zest Protocol introduces two distinct pool types to cater to varying user needs. The Bitcoin yield pools provide users with the opportunity to earn yields on their BTC holdings, encouraging a productive utilization of Bitcoin. Conversely, the Bitcoin collateral pools empower users to borrow against their BTC, offering liquidity without the need to liquidate their assets.
How does it work?
Zest Protocol runs on smart contracts that are secured by the Bitcoin blockchain. These are Clarity smart contracts on Stacks, a Bitcoin L2.
Clarity smart contracts on Stacks can interact with Bitcoin by reading the Bitcoin state directly from the Bitcoin blockchain without requiring an intermediary (such as a server). Additionally, Bitcoin and Stacks blocks are produced at the same time allowing for unique cross-chain functionality. Stacks is their secret sauce.
To hold BTC in escrow in Zest liquidity pools or as collateral, we leverage the Stacks layer’s unique architecture that enables the trustless wrapping of BTC into a tokenized version of BTC that can be moved on the Stacks network. When a user sends BTC to Zest Protocol through the Zest Protocol UI, the BTC gets wrapped to a tokenized version of BTC on the Stacks layer (sBTC). Subsequently, the sBTC programmatically ends up in the Zest pool contracts.
When a user withdraws BTC from Zest Protocol, Zest Protocol facilitates a programmatic unwrapping from sBTC to BTC. The withdrawing user receives native BTC directly into their Bitcoin wallet. For the first time, users can interact with a lending app while only using BTC.
Stacks’ unique ability to read the Bitcoin state in combination with synchronized block production between the Bitcoin blockchain and Stacks layer enables the wrapping from BTC to sBTC and back to happen programmatically without reliance on a third party.
Clarity smart contracts on Stacks can interact with Bitcoin by reading the Bitcoin state directly from the Bitcoin blockchain without requiring an intermediary (such as a server). Additionally, Bitcoin and Stacks blocks are produced at the same time allowing for unique cross-chain functionality. Stacks is their secret sauce.
To hold BTC in escrow in Zest liquidity pools or as collateral, we leverage the Stacks layer’s unique architecture that enables the trustless wrapping of BTC into a tokenized version of BTC that can be moved on the Stacks network. When a user sends BTC to Zest Protocol through the Zest Protocol UI, the BTC gets wrapped to a tokenized version of BTC on the Stacks layer (sBTC). Subsequently, the sBTC programmatically ends up in the Zest pool contracts.
When a user withdraws BTC from Zest Protocol, Zest Protocol facilitates a programmatic unwrapping from sBTC to BTC. The withdrawing user receives native BTC directly into their Bitcoin wallet. For the first time, users can interact with a lending app while only using BTC.
Stacks’ unique ability to read the Bitcoin state in combination with synchronized block production between the Bitcoin blockchain and Stacks layer enables the wrapping from BTC to sBTC and back to happen programmatically without reliance on a third party.
While sBTC sits in a Zest pool, the equivalent amount of BTC is held in a threshold-signature script on the Bitcoin blockchain controlled by Stacks consensus. For security purposes, the BTC can only be moved out of the threshold-signature script every 150 Stacks/Bitcoin blocks, which is when the Stacks layer reaches Bitcoin finality, and Stacks blocks can no longer be altered without changing Bitcoin history in a deep reorg. Every 150 Bitcoin/Stacks blocks, Stacks blocks become secured by the entire hash power of the Bitcoin network.
Let’s dive into each of the steps block-by-block to see how we leverage the Stacks layer’s unique network architecture to enable on-chain Bitcoin lending.
Block 1:
Zest Protocol fetches the Bitcoin address for the sBTC threshold-signature script and presents this Bitcoin address to the LP.
A threshold signature is a signature whose private key is distributed over multiple addresses. For the sBTC threshold-signature script, the private key is held by an open network of Stackers - who lock up STX as part of Stacks consensus.
Depositing user sends BTC to the sBTC threshold signature script on the Bitcoin blockchain.
Let’s dive into each of the steps block-by-block to see how we leverage the Stacks layer’s unique network architecture to enable on-chain Bitcoin lending.
Adding BTC to a pool: BTC—>sBTC peg-in
Block 1:
Zest Protocol fetches the Bitcoin address for the sBTC threshold-signature script and presents this Bitcoin address to the LP.
A threshold signature is a signature whose private key is distributed over multiple addresses. For the sBTC threshold-signature script, the private key is held by an open network of Stackers - who lock up STX as part of Stacks consensus.
Depositing user sends BTC to the sBTC threshold signature script on the Bitcoin blockchain.
Block 2:
Stacks consensus trustlessly confirms the depositing user’s Bitcoin transaction thanks to the unique ability of Stacks nodes to read the Bitcoin state.
In the same block, sBTC is minted to the Zest Protocol BTC pool as a claim on the BTC in the threshold-signature script.
A tokenized receipt is minted to the Deposited user’s wallet address as a claim on deposited BTC (they will use this receipt to get their BTC back during withdrawal).
Stacks consensus trustlessly confirms the depositing user’s Bitcoin transaction thanks to the unique ability of Stacks nodes to read the Bitcoin state.
In the same block, sBTC is minted to the Zest Protocol BTC pool as a claim on the BTC in the threshold-signature script.
A tokenized receipt is minted to the Deposited user’s wallet address as a claim on deposited BTC (they will use this receipt to get their BTC back during withdrawal).
Withdrawing BTC from a pool: sBTC—>BTC peg-out
Block 1:
A withdrawing user seeks to draw down BTC funds. They specify a BTC address for drawdown on the Stacks layer and prove that they own a claim to the pool.
Block 2:
Zest Protocol BTC pool moves sBTC to the threshold-signature script.
Zest Protocol BTC pool moves sBTC to the threshold-signature script.
At Bitcoin finality (150 blocks):
Stacks consensus produces a signature to release BTC from the threshold-signature script to the withdrawing user.
The sBTC gets burnt.
For security purposes, the BTC can only be moved out of the threshold-signature script every 150 Stacks/Bitcoin blocks (~24 hours), which is when the Stacks layer reaches Bitcoin finality and Stacks blocks can no longer be altered without changing Bitcoin history in a deep reorg. As a result, every 150 Bitcoin/Stacks blocks Stacks history becomes secured by the entire hash power of Bitcoin.
Stacks consensus produces a signature to release BTC from the threshold-signature script to the withdrawing user.
The sBTC gets burnt.
For security purposes, the BTC can only be moved out of the threshold-signature script every 150 Stacks/Bitcoin blocks (~24 hours), which is when the Stacks layer reaches Bitcoin finality and Stacks blocks can no longer be altered without changing Bitcoin history in a deep reorg. As a result, every 150 Bitcoin/Stacks blocks Stacks history becomes secured by the entire hash power of Bitcoin.
Final Thoughts
The Zest Protocol stands as an emblem of transformative innovation in the realm of decentralized finance, a pioneering solution designed to unleash the dormant potential of Bitcoin and drive its evolution from a mere store of value to a dynamic and productive asset. In a landscape marred by counterparty risk and opacity, Zest Protocol emerges as a beacon of change, ushering in a new era of lending and borrowing by harnessing the power of smart contracts secured on the Bitcoin blockchain itself.
The need for an on-chain Bitcoin capital market becomes evident when examining the limitations of existing solutions. Centralized lending platforms expose users to counterparty risk, inhibiting the productive use of Bitcoin and obstructing its growth. Zest Protocol, however, redefines the lending landscape by offering a solution that leverages the robustness and transparency of blockchain technology.
The protocol's multi-faceted approach encompasses two pool types - Bitcoin yield pools and Bitcoin collateral pools. This duality caters to a spectrum of users, offering a chance to earn yields on BTC holdings or borrow against them, enabling liquidity without necessitating asset liquidation.
In conclusion, Zest Protocol not only presents an inventive solution to the challenges that have hindered Bitcoin's broader adoption but also establishes itself as a beacon of innovation within the decentralized finance space. By embracing the transformative power of blockchain technology, Zest Protocol paves the way for a new era where Bitcoin becomes not only a store of value but a catalyst for financial growth and inclusion.
The need for an on-chain Bitcoin capital market becomes evident when examining the limitations of existing solutions. Centralized lending platforms expose users to counterparty risk, inhibiting the productive use of Bitcoin and obstructing its growth. Zest Protocol, however, redefines the lending landscape by offering a solution that leverages the robustness and transparency of blockchain technology.
The protocol's multi-faceted approach encompasses two pool types - Bitcoin yield pools and Bitcoin collateral pools. This duality caters to a spectrum of users, offering a chance to earn yields on BTC holdings or borrow against them, enabling liquidity without necessitating asset liquidation.
In conclusion, Zest Protocol not only presents an inventive solution to the challenges that have hindered Bitcoin's broader adoption but also establishes itself as a beacon of innovation within the decentralized finance space. By embracing the transformative power of blockchain technology, Zest Protocol paves the way for a new era where Bitcoin becomes not only a store of value but a catalyst for financial growth and inclusion.