Binance Labs invests, how does Zest build Bitcoin lending DeFi?

Author: 1912212.eth, Foresight News

How to open various earning opportunities for Bitcoin holders has always been one of the directions for industry exploration. In the long cycle of the crypto bull market, passively holding Bitcoin and waiting for its price to appreciate seems to waste capital efficiency.

Zest is a DeFi project specifically designed for Bitcoin, which recently raised $3.5 million in seed funding, led by Tim Draper, with participation from Binance Labs. Tim Draper is a venture capital mogul in Silicon Valley, having invested in well-known companies such as Baidu, Skype, and Hotmail, and has also participated in investments in Web3 projects like Arkham, Coinbase, Gemini, Ledger, and Maker. Notably, this is also the first investment by Binance Labs in the Stacks ecosystem. As an L2 on Bitcoin, what characteristics does the DeFi project Zest based on Stacks have?

Introduction to Zest

Zest Protocol is a Bitcoin lending protocol based on Stacks. In previous solutions for Bitcoin, users often needed 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 their funds at any time, with no third-party trust risk.

Zest's founder, TychoTycho, graduated from the University of Oxford and was featured on Forbes' 30 Under 30 list. Before founding Zest, he was a core contributor and developer for Stacks. He also served as an executive at Trust Machines, a developer in the Bitcoin ecosystem. His impressive resume has attracted significant attention to Zest.

Operating Mechanism

Zest primarily uses the Stacks Layer 2 architecture, allowing native BTC to be transferred to Stacks as sBTC (launched in October 2023, a 1:1 supported version of BTC on Stacks), while users interact with the native BTC on the Bitcoin chain.

Although users' sBTC is stored in the Zest pool, an equivalent amount of BTC is held in a threshold signature script on the Bitcoin chain under the Stacks consensus mechanism.

Moreover, staking and lending on Zest do not incur wrapping fees, while wBTC charges a fee for wrapping.

It is worth mentioning the Clarity smart contract on Stacks, which allows users to interact by reading the BTC state from the Bitcoin chain. The lending feature of Zest is based on Clarity, designed with reference to Aave v3. However, since the sBTC hard fork on Stacks is still pending until mid-year, its main functionalities will only be observable after the upgrade.

In the design of the Zest mechanism, two types of roles play important roles in lending: liquidity pool representatives and institutional borrowers.

Liquidity pool representatives primarily manage the BTC lending pools on Zest. Each Bitcoin liquidity pool is managed by a liquidity pool representative. The representative is responsible for negotiating loan terms with borrowers, conducting due diligence, and liquidating collateral in case of default. They review the borrower's reputation, expertise, and performance to assess loan terms.

Once the borrower and the liquidity pool representative agree on the borrower's interest rate and collateral ratio, the representative will fund the loan from the pool they manage. Pool representatives are appointed by the Zest Protocol DAO contract, and if power is abused, the Zest Protocol DAO contract can freeze the pool and withdraw loans.

The powers of liquidity pool representatives include creating Bitcoin pools to attract funds, approving or denying loans, assessing borrowers, and managing the balances in the pool. In other words, all pool representatives must be whitelisted before creating a lending pool.

When the user's identity is that of an institutional borrower, Zest allows them to borrow BTC using their balance sheet.

Additionally, Zest has set up a grace period for all lending users. When the value of collateral falls below the liquidation price, there is a 3-day grace period during which users can add collateral to avoid forced liquidation.

Currently, users earn 1 point for every $1 worth of collateral daily. They can also earn points by inviting friends through shared links.

Last month, shortly after deploying the mainnet, Zest was attacked by hackers who manipulated the collateral value by repeating entries in the collateral list, allowing them to withdraw far more STX than they should have in five lending operations. The attackers stole a total of 324,000 STX. Although all losses will be compensated by the Zest treasury, it still caused some negative impact. Zest has reopened after a security audit last week.

In the lending functionality section, Zest has temporarily launched the Stacks market and will soon launch the BTC market. According to its official data, it has already achieved over $10 million in TVL. With the upcoming sBTC hard fork upgrade, once market enthusiasm is reignited, Zest may experience a strong growth period.