Bitcoin ecology has emerged in this bull market, with projects such as Layer2 and DeFi taking the lead. Among them, what makes Bitcoin lending DeFi, in which Binance Research Institute has invested, unique?
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Creating various income opportunities for Bitcoin holders has always been one of the directions explored by the industry. In the big cycle of the crypto bull market, it seems somewhat inefficient to passively hold Bitcoin and wait for its price to rise.
Zest is a DeFi project specifically designed for Bitcoin, and recently it has received a $3.5 million seed round of financing with Tim Draper as the lead investor and participation from Binance Labs. Tim Draper, the godfather of Silicon Valley venture capital, 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 the first investment by Binance Labs in the Stacks ecosystem. As an L2 on Bitcoin, what are the unique features of Zest, a DeFi project based on Stacks?
Introduction to Zest
Zest Protocol is a Bitcoin lending protocol based on Stacks. In the past, in 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 has been 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 Machinese, a developer for the Bitcoin ecosystem application ecosystem. Zest has gained considerable attention due to TychoTycho’s impressive resume.
Execution Mechanism
Zest mainly adopts the Stacks Layer2 architecture, which enables native BTC to be transferred to Stacks and become sBTC (to be launched in October 2023, a BTC version supported 1:1 on Stacks), while users interact with the native BTC on the Bitcoin chain.
Although users’ sBTC is stored in the Zest pool, an equal 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, it is necessary to 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, and its design is inspired by Aave v3. However, because the sBTC hard fork on Stacks is still expected in mid-2022, its main functions can only be observed after the upgrade.
In the design of Zest’s mechanism, two types of roles played by borrowers are of great importance, namely, the liquidity pool representative and institutional borrower.
The liquidity pool representative is mainly responsible for managing the Bitcoin lending pool on Zest. Each Bitcoin liquidity pool is managed by a liquidity pool representative. The liquidity pool representative is responsible for negotiating loan terms with borrowers, conducting due diligence, and liquidating collateral in the event of default. The liquidity pool 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 collateral ratio for the borrower, the liquidity pool representative will provide funds for the loan from the loan pool they manage. The pool representative is appointed by the Zest Protocol DAO contract, and if power is abused, the Zest Protocol DAO contract can freeze the pool and withdraw the loan. The permissions of the liquidity pool representative include creating Bitcoin pools to attract funds, granting or refusing loans, evaluating borrowers, and managing balances in the pool. In other words, before establishing a lending pool, all pool representatives must be whitelisted. When the user’s identity is an institutional borrower, Zest allows them to borrow BTC using their balance sheet.
In addition, Zest has set a grace period specifically 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 increase the collateral to avoid forced liquidation. Currently, users earn 1 point for every $1 worth of collateral per day. Additionally, they can earn points by inviting friends through referral links.
Last month, shortly after Zest deployed its mainnet, it was attacked by hackers. The attackers manipulated the value of collateral by duplicating entries in the collateral list, allowing them to withdraw far more STX than their assigned quota in 5 loan operations. The attackers stole a total of 324,000 STX, and although all losses will be compensated by the Zest treasury, it still had a certain negative impact. Zest has reopened after security audits last week.
In the lending section, Zest has temporarily launched the Stacks market and is about to launch the Bitcoin market. According to official data, it has already obtained over $10 million in Total Value Locked (TVL). With the upcoming sBTC hard fork upgrade, once market enthusiasm is reignited, Zest may enter a period of strong growth.
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