Learn & Earn with Zest Protocol (ZEST) : Building DeFi for Bitcoin
Introduction: Zest Protocol is a DeFi protocol built for Bitcoin. Fully on-chain and open-source, Zest aims to make Bitcoin productive by enabling users to deposit assets, earn yield, accumulate points, and borrow against collateral through its Stacks Market. Live on Stacks, a leading Bitcoin Layer 2, Zest is building toward a broader vision: a Bitcoin-backed lending ecosystem where BTC can become prime collateral across DeFi without losing the core security values that make Bitcoin unique.
Bitcoin Should Not Sit Idle
Bitcoin is the most recognized and liquid crypto asset in the world, but much of it still sits idle. Many BTC holders want to keep long-term exposure to Bitcoin while also accessing liquidity, earning yield, or participating in DeFi. The problem is that most existing solutions require users to make a difficult tradeoff.
In traditional finance, large institutions can borrow against Bitcoin by placing BTC with qualified custodians and using structured agreements. But this type of setup is expensive, requires onboarding, and is usually only practical for large borrowers.
Retail users face a harder choice. To use BTC in DeFi, they often need to give up direct custody by bridging, wrapping, or relying on validator sets and custodial systems. This introduces trust assumptions that many Bitcoin holders are uncomfortable with.
Zest Protocol is built around a different idea: Bitcoin should be usable as productive collateral, but without forcing users to abandon the principles of self-custody and security.
What Is Zest Protocol?
Zest Protocol is a Bitcoin-focused DeFi protocol that enables borrowing and lending markets around Bitcoin-related assets. Its Stacks Market allows users to deposit assets such as STX, sBTC, stSTX, USDC, and others to earn yield and access overcollateralized loans.
The protocol is live on Stacks, a Bitcoin Layer 2 designed to bring smart contract functionality to the Bitcoin ecosystem. Zest has become a major DeFi protocol on Stacks, with deposits and borrowing activity reaching significant levels in its market.
The goal is not simply to create another lending market. Zest is trying to build the financial layer around Bitcoin as collateral. Instead of treating BTC as an asset that only sits in wallets, Zest wants to make every sat more useful across lending, borrowing, and future BTC-backed financial applications.
Stacks Market V2: Smarter Risk and Better Capital Efficiency
Zest’s Stacks Market V2 improves the way lending parameters are handled.
In earlier lending designs, each collateral asset often had a single loan-to-value ratio, liquidation threshold, and liquidation penalty. These same parameters applied broadly, regardless of which debt asset was borrowed. This can be inefficient because different collateral-debt pairs behave differently.
Stacks Market V2 introduces Risk Groups. Instead of applying one fixed template to every asset, Risk Groups allow each collateral-debt pair to have its own parameters, including LTV, liquidation thresholds, penalties, and other settings.
This creates several benefits.
Stable or closely correlated assets can support higher LTVs without adding unnecessary risk. More volatile asset pairs can use lower LTVs and earlier liquidation thresholds to protect the protocol. New assets can also be onboarded more flexibly because parameters can be tailored to their actual behavior.
V2 also introduces smoother liquidations. Instead of sudden liquidation cliffs, liquidations can happen through stepped reductions and varying penalties, giving borrowers more chances to manage risk before a position is fully closed.
Another important feature is optional non-rehypothecation, allowing users to keep deposits strictly segregated as collateral so those assets are not lent out.
Bitcoin Collateral Vaults: Native BTC as DeFi Collateral
One of Zest’s most ambitious developments is Bitcoin Collateral Vaults.
Bitcoin Collateral Vaults are designed to let users post native BTC as collateral while keeping Bitcoin on the Bitcoin blockchain. Instead of sending BTC through bridges, wrappers, or custodians during normal operation, the user’s Bitcoin remains in a self-custodial vault on Bitcoin L1. Lending activity can happen on another DeFi chain, while BTC only moves in the event of liquidation.
This matters because it reduces exposure to risks such as bridge failure, custodian failure, or destination-chain failure. If a destination chain were to fail, the vault’s timelock structure can allow the user to recover BTC back on Bitcoin.
In the fully realized version, Bitcoin Collateral Vaults use BitVM to verify external smart contract state directly on Bitcoin through cryptographic proofs. A borrower locks BTC into a Taproot UTXO with defined spend paths. Depending on whether a loan is repaid or liquidated, a valid proof determines whether BTC returns to the depositor or moves to a liquidation address.
The long-term trust model is designed to reduce assumptions to Bitcoin consensus, the destination-chain state, and the presence of at least one honest challenger during the challenge window.
In simple terms: BTC stays on Bitcoin, while stablecoin liquidity can come from where DeFi liquidity already exists.
How Zest Brings Vaults to Mainnet
Because full BitVM verification is not yet production-ready, Zest plans to ship Bitcoin Collateral Vaults in two phases.
Phase 1 uses pre-signed Bitcoin transactions with constrained spend paths. In this model, BTC can only move back to the borrower or to a named institutional liquidator. Watchtowers help execute the correct path, while a guardian council acts as an initial trust anchor that can challenge incorrect actions when required.
This phase allows Zest to test the full collateral lifecycle on Bitcoin mainnet, including vault construction, UTXO management, liquidations, partial withdrawals, and cross-chain settlement mechanics, without waiting for experimental BitVM tooling to become fully mature.
Phase 2 replaces the operational trust layer with full BitVM verification. In this phase, proof verification directly gates the vault’s spend paths, removing the need for pre-signed variants or threshold signing. The user-facing experience remains similar, but the verification model becomes more trust-minimized.
This phased approach is important because it allows Zest to build and battle-test real infrastructure first, then upgrade the verification layer as BitVM becomes production-ready.
Why Zest Matters
Zest matters because it focuses on one of the biggest opportunities in DeFi: making Bitcoin productive without compromising its core value proposition.
Bitcoin-backed lending is a large market opportunity because BTC is widely held, highly liquid, and globally recognized. But for many users, existing DeFi solutions require too much trust. Zest’s approach is to build lending markets around Bitcoin while moving toward a future where BTC can remain on Bitcoin and still unlock liquidity across DeFi.
Its Stacks Market already provides borrowing and lending functionality for Bitcoin-related assets. Its Risk Group system improves capital efficiency and risk control. Its Bitcoin Collateral Vault roadmap points toward a future where native BTC can become usable DeFi collateral without relying on traditional wrapped BTC models.
In short, Zest Protocol is building infrastructure for Bitcoin finance: a system where users can borrow, lend, earn, and unlock liquidity while keeping Bitcoin at the center.
Referral Rewards:
Invite new users to join the Learn & Earn campaign and unlock extra rewards. For each successfully invited friend who registers and completes the required trades, you will receive a 25% fee rebate. The more qualified users you invite, the more rewards you can earn. For details, please refer to: https://www.kucoin.com/referral
How to Invite
Disclaimer: The information on this page may come from third parties and does not necessarily reflect the views or opinions of KuCoin. This content is for reference only and does not constitute any form of representation or warranty, nor should it be construed as financial or investment advice. KuCoin is not responsible for any errors or omissions, or for any outcomes resulting from the use of this information. Investing in virtual assets may involve risks. Please carefully assess the product risks and your risk tolerance based on your financial situation. For more information, please refer to our Terms of Use and Risk Disclosure.