Zest Bets Bitcoin Can Back Loans Without Ever Leaving Its Own Chain

Bitcoin holds the greatest market value among crypto assets, but the majority of the supply remains idle. Research by Spark identified just 91,332 BTC on Bitcoin layer‑2 networks in May 2026, representing roughly 0.46% of the circulating supply. Even when wrapped tokens and Babylon staking are included, the active share rises to only about 0.8%.

Current reliance on wrapped Bitcoin

When Bitcoin is used as collateral today, it is typically wrapped into tokens such as WBTC on Ethereum. Custodians retain the underlying BTC while the wrapped token circulates on the EVM chain. This model introduces dependency on the custodian’s redemption system. In August 2024, BitGo announced a custody shift for WBTC to a joint venture with BiT Global, prompting risk concerns. Aave’s Ethereum market held approximately $2.2 billion of supplied WBTC at that time, and Coinbase later delisted WBTC in December 2024, citing control risks.

Zest Protocol’s Bitcoin Collateral Vaults

Zest Protocol, operating on the Stacks layer, launched a capped mainnet demo of its Bitcoin Collateral Vaults on September 23, 2026. The system allows users to borrow against BTC on EVM chains without wrapping the coins. Key features include:

• Self‑custodial vaults on Bitcoin Layer 1, each holding a single user’s BTC.
• Vaults implemented as Taproot outputs with fixed spending paths, preventing pooled collateral.
• Loans issued on an EVM chain (Ethereum in the demo) via a collateral record linked to the vault.
• Borrowers can draw USDC, adjust collateral, and receive partial liquidations.
• In the event of a destination‑chain failure, users can reclaim BTC after a Bitcoin timelock using only their own keys.

Guardian‑based settlement and future BitVM integration

During the initial production phase, independent guardians verify settlement events such as repayments or liquidations. A quorum of guardians can reverse invalid payouts within a contest window, returning BTC to the vault. Zest plans to replace guardians with BitVM, a Bitcoin‑native verification system that uses zero‑knowledge proofs and challenger disputes to enforce settlement rules.

Comparison with other proposals

Babylon Labs has proposed a similar Taproot‑based vault for Aave V4, relying on zero‑knowledge proofs without custodial control. Zest’s current design still depends on unnamed guardians, and details such as quorum size and timelock durations have not been disclosed. Both approaches face practical questions about liquidation robustness under market stress and challenger incentives.

Outlook

If Zest’s guardians are replaced by BitVM and external audits lift the collateral caps, Bitcoin could serve as direct, non‑wrapped collateral for cross‑chain lending, potentially increasing the utility of the dormant BTC supply.