Zest Bets Bitcoin Can Back Loans Without Ever Leaving Its Own Chain
Bitcoin is the most important crypto asset by market worth, but nearly all of it sits nonetheless. Spark’s research counted 91,332 BTC throughout Bitcoin layer-2 networks in May 2026, or about 0.46% of the circulating provide. Adding each wrapped token and all Babylon staking lifts the share to solely about 0.8%.
Most holders who do put BTC to work wrap it first. A custodian retains the true cash, and a token corresponding to WBTC stands in for them on Ethereum (ETH). Any mortgage taken in opposition to that token then is determined by the custodian and its redemption system staying sound.
WBTC holders have been reminded of that dependency in August 2024. BitGo said it could shift custody of WBTC to a three way partnership with Justin Sun-linked BiT Global.
Aave’s Ethereum market held about $2.2 billion in equipped WBTC on the time, in accordance with threat supervisor Chaos Labs. Coinbase went additional and delisted WBTC in December 2024. When BiT Global sued over the choice, Coinbase’s court docket submitting cited the danger that management would “fall into the palms of Justin Sun.”
Zest Protocol, which runs a Bitcoin lending market on Stacks, is testing a route that leaves the cash on Bitcoin. On September 23, it launched a capped mainnet demo of its Bitcoin Collateral Vaults. It lets holders borrow in opposition to BTC on EVM chains without wrapping it.
How a Vault on Bitcoin Backs a Loan on EVM Chains
According to the agency, Bitcoin Collateral Vaults are self-custodial vaults on Bitcoin L1. Bitcoin’s personal guidelines govern how they are often spent, and the design is meant to assist BitVM proof verification.
Each vault holds one consumer’s BTC, and cash from totally different customers are by no means pooled, in accordance with the documentation. Each vault is a Taproot output with spending paths fastened on the deposit, which limits the place the BTC can transfer.
The mortgage occurs on an EVM chain, which is Ethereum within the demo. On that chain, the Bitcoin vault is represented by a collateral file tied solely to it. The borrower makes use of that file to attract USDC from a related lending market whereas the BTC stays within the vault.
Positions can change measurement after they open. Borrowers can add collateral or withdraw the surplus if Bitcoin’s value rises. Liquidations may also be partial, settling a pre-set quantity and returning the remainder to the vault in BTC. Zest says different vault designs can solely launch collateral in full.
The design additionally plans for the vacation spot chain failing. If the chain went offline for good, the depositor might nonetheless reclaim eligible BTC after a Bitcoin timelock expires. That restoration wants solely the consumer’s personal key and public vault information, with no signature from Zest.
“We’ve spent 5 years on programmable Bitcoin, first on Stacks and now on Bitcoin itself. Today you’ll be able to put actual BTC in a vault on Bitcoin and borrow in opposition to it on mainnet,” stated Tycho Onnasch, founding father of Zest Protocol.
Each pockets is topic to a collateral cap till exterior audits are full, after which Zest plans to launch to manufacturing.
Guardians Stand Watch Until BitVM Takes Over
Bitcoin enforces the vault’s spending guidelines, however every settlement nonetheless wants a separate examine. In the primary manufacturing section, unbiased guardians deal with that examine, in accordance with Zest.
When an occasion corresponding to a reimbursement or liquidation occurs on the lending chain, an attestation triggers a settlement that the borrower approved upfront. Guardians examine that settlement, and a quorum of them can reverse an invalid payout throughout a contest window.
Reversed BTC returns to the vault set out within the guidelines. The doc says no operator can add outcomes, change quantities, or redirect payouts as soon as the vault is about.
Zest plans to shift that function to BitVM, a system for verifying computation on Bitcoin with out altering its guidelines. Under Zest’s deliberate design, a celebration claiming a reimbursement or liquidation posts that declare on Bitcoin.
Challengers then have a set window to dispute it, which forces the claimant to submit a zero-knowledge proof. An invalid proof lets the challenger block the withdrawal. The documentation notes that safety is determined by the development Zest selects and an sincere challenger appearing in time.
Zest factors to printed BitVM3 benchmarks that put onchain prices below $100. Those figures relaxation on the benchmarks’ personal assumptions, and earlier designs value 1000’s.
A Rival Design Puts Zest’s Guardians Under the Spotlight
Zest is one in all a number of groups attempting to maintain BTC collateral on Bitcoin. Babylon Labs proposed the same vault system for Aave V4 in May, additionally constructed on Taproot outputs. Babylon’s proposal says redemption depends on zero-knowledge proofs and challenges, with no custodian or signer group holding discretionary management over the BTC.
Zest’s first manufacturing section, in contrast, depends on guardians till its personal BitVM verification goes reside. The firm has not disclosed who the guardians are or what number of type a quorum. It additionally has not detailed how lengthy liquidation timelocks or contest home windows final.
Both designs face the identical sensible exams. One commenter on Babylon’s Aave proposal requested how liquidations would maintain up throughout market stress. The identical publish questioned challenger incentives and the way lengthy redemptions on Bitcoin would take. Zest’s vaults will face these questions, too, as soon as the caps carry.
Holders who by no means trusted a wrapper might want the guardians named earlier than locking up greater than a check quantity.
The publish Zest Bets Bitcoin Can Back Loans Without Ever Leaving Its Own Chain appeared first on BeInCrypto.
