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Most new cryptocurrency investors start their journey into the blockchain world by buying Bitcoin. It’s the most sensible place to start, after all, as Bitcoin is the original, most widely used, and most trusted cryptocurrency out there.
Furthermore, people know that they can expect a good return on their investment simply by holding these tokens. Throughout its lifespan, the value of Bitcoin has been consistently on an uptrend, regularly hitting new all-time highs every two to three years, although there have been many ups and downs along the way.
As good as Bitcoin is, many people quickly find that investing in Bitcoin isn’t particularly profitable. People buy bitcoin and then just sit on it and wait for the value to go up. But they don’t actually do anything with their bitcoin. As a result, bitcoin is mostly a wasted asset that sits around collecting dust, as opposed to providing holders with some passive income by generating interest like traditional money does.
The good news is that this lack of productivity in Bitcoin is now being addressed with the upcoming launch of the Zest protocol on the Stacks blockchain. Zest delivers on-chain bitcoin capital markets that enable holders to earn a sustainable return on their assets through professionally managed pools of credit. Meanwhile, institutional borrowers benefit from undercollateralized on-chain Bitcoin funding without fear of liquidation.
How Zest works
For Bitcoin holders, the launch of the Zest protocol promises to be a game changer, giving many their first real opportunity to earn a return on their BTC holdings.
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It couldn’t be easier. Simply visit Zest’s website, choose a loan pool that offers a reasonable return, then choose how long you’re willing to lend your BTC. Once that’s done, Zest’s smart contracts send that BTC to an institutional borrower looking for capital. To qualify for loans, borrowers must first be screened by the pool’s delegate to provide some assurance that they will not default. Then all they have to do is sit back and wait to receive regular reward payments from the loan pool before getting their BTC back after the loan period expires.
In other words, Bitcoin holders looking to lend their wealth are the “liquidity providers,” one of six contributors making Zesty work. The LPs, as they are known, deposit bitcoin into liquidity pools used to fund loans and can earn a 3% to 6% annualized return on undercollateralized loans.
Pool delegates now play an important role as they are the ones who need to carefully screen borrowers and agree repayment terms with them. You can add whitelisted borrowers to the pool once they are satisfied. Borrowers can then request capital from any pool they are eligible for, which they do by creating a vault to hold their collateral and providing an address to receive the BTC.
So-called “stakers” play another key role. Each loan pool is linked to a staking pool that gets the first hit in case a borrower defaults. Loan pool delegates must participate, which encourages them to be mindful of which borrowers they approve, although others may jump in for higher returns.
Other participants include the Zest protocol treasury, which charges fees in BTC, and ZEST token holders, who are tasked with voting on new pool delegates and making updates to the protocol.
The great thing about the Zest protocol is the simplicity it offers for both liquidity providers and borrowers who just need to understand how a bitcoin wallet works to lend and borrow money. For pool delegates and stakers, their job is a bit more complicated, as they need to interact with the Stacks network, an independent blockchain settled on Bitcoin, to access Clarity’s smart contracts that power Zest.
Clarity’s stack-built smart contracts are key as they have read access to bitcoin status. This means they can “see” events that occur on the Bitcoin blockchain, e.g. B. when a borrower successfully makes a scheduled repayment or, alternatively, misses a payment. In response to these events, the Zest protocol smart contracts then distribute agreed-upon rewards to bitcoin holders or liquidate any collateral or funds wagered if the situation warrants it.
Bitcoin Bonds
There will be even more opportunities in the future as Zest Protocol plans to introduce tokenized receipts of bitcoin loans to liquidity providers. These are essentially bitcoin fixed income bonds that can be traded on secondary markets. The Bitcoin bonds could then be used as collateral for various other decentralized finance applications, just like traditional bonds are used as collateral for bank loans.
Zest Protocol seems to think there will be quite a bit of demand for this service, indicating how Genesis alone issued nearly $13 billion in BTC loans in the fourth quarter of 2021. It’s also seeing plenty of people willing to lend their capital, given the fact that massive amounts of BTC are reportedly being held by “whales” just sitting there untouched.
“Through the Zest protocol, there is a way to make your bitcoin productive and profit from it,” the company explains.
Perhaps the only real downside is that the Zest protocol isn’t really available yet. The team is still developing their smart contracts and will undergo multiple audits before launching at the end of Q2. First, Zest said it will seek to provide credit to arbitrage traders, market makers, exchanges, and OTC desks, which are among the largest Bitcoin borrowers today.
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