When crypto started through blockchain revolution, it was designed to be a chain only token that was meant for the monetary value transfer. However with Ethereum and other blcokchains innovation started towards the smart contracts which made things like lending, borrowing and deposits easier.
Ethereum has plenty of protocols on it's platform like - Aave, compound, silo finance and many others. Each year we see new lending and the borrowing marketplace opening on ethereum layer 2. And a lot of them are profitable too. Some of them die under the weight of the regulation.
In case of bitcoin, ever since Lightning network has pushed for layer 2 innovation. There has been rise in the bitcoin projects. Not just small tips, now the smart contracts too are being built under the layer 2 of the chain. So there is this new protocol being launched called Zest Protocol.
Let's take a look at the zest protocol and how it is being used for the lending and borrowing on the chain.
What is Zest Protocol? How it is being used for lending and borrowing?
Zest Protocol is a protocol that is designed for the bitcoin on chain method for the lending. You may notice that is open source and requires the smart contract for the lending and borrowing triggers. It is also one of the on chain asset solution that does not require any other asset for pegging. So the bitcoin itself is the commodity. In short this on chain solution has been developed for the lending and borrowing bitcoin through this protocol.
It is currently under the test and it is going to be released in the mid 2024. Basically the Clarity stacks L2 is being used for the smart contract creation. And it triggers the escrow whenever the user deposits the funds. And there is also same escrow on the zest protocol being triggered for both lending and borrowing. So the wrapping and unwrapping of the sBTC to BTC is done by this protocol. You can read more on how zest works here.
Ethereum Lending Protocols vs Bitcoin Lending Protocol
I think ethereum over the yeas have matured more than enough to give any other chain run for the money. It has developed a vast array of tools and the means that makes the ethereum useful for the users. And they can do the lending, borrowing and the trigger variety of the escrows. In that context ethereum has matured a lot and that is why we have uniswap and other marketplaces too. Take aave finance for an example here.
In case of the bitcoin lending. I think it's too early. And the amount of the protocols and the defi marketplaces are very harsh going on. Zest protocol is a start. I am sure there must be many other projects in the pipeline for the lending and the escrow systems. There should be more on the borrowing too. Like kava is on ethereum they would easily get into the bitcoin too. It just needs one validation and party of competitors come in easily.
What does bitcoin lending protocol mean for the consumers?
The ultimate value to be derived out of the projects like these is for the consumers. They are the one who are likely to borrow, lend and also do the escrow system for the variety of the funds movements. And this means having this on the bitcoin chain L2 would make things easier for them. Clarity Stacks L2 is being used here for the layer 2 magic. And this would be a good innovation for many other bitcoin based projects too.
If more of such projects come to the bitcoin, that means it would be easier for the regulations to also verify and validate the value too. So we can expect the blackrock, JPM and many others coming in this space and then use this for the lending and borrowing market. In fact financial settlment through such projects would make the overall value much easier to be given to the consumers and it would mean more TradFi can come in here.
Zest protocol is a start towards the lending and borrowing market on bitcoin Layer 2 and it can make a lot of changes in the lending space as the bitcoin becomes the wrapped asset retaining the value of bitcoin. Let's see where this project goes in the space of lending and borrowing market.