Zest Protocol Co-founder: Adding New Programming Capabilities Could Propel BTC’s Defi Ecosystem Beyond ETH’s

BTC as a Store of Value

Despite holding much promise, Bitcoin L2s seemingly have inherent security risks inherited from Layer 1. Therefore, before trusting these L2s with their funds, users first need to understand how they handle deposits and withdrawals of bitcoin ( BTC) from the base layer, Onnasch explained.

Regarding the role or use of BTC as a store of value, the Zest Protocol co-founder said more needs to be done to sustain this attribute. He suggested that one way this can be achieved is by bringing financial activity to the Bitcoin network. This, he said, will turn out to be “critical for BTC’s further development and adoption as a global reserve asset.”

In his written responses sent to Bitcoin.com News, Onnasch also shared his thoughts on the Stacks network’s highly anticipated Nakamoto upgrade and its likely to have an impact on Bitcoin defi in the future. His answers to all the questions posed are provided below.

Bitcoin.com News (BCN): Bitcoin has long been viewed as a store of value. However, in recent years, we’ve seen a surge in decentralized finance ( defi) and non-fungible token ( NFT) activity within the Bitcoin ecosystem. Why, in your opinion, does Bitcoin require a native, decentralized, universally accessible defi infrastructure? What necessitates the separation of the asset from the infrastructure?

Tycho Onnasch (TO): The world has realised that BTC is an incredible asset as a store of value. However, there’s much more that can be done with the Bitcoin network (the rails) on which the asset lives – and this usage of the Bitcoin network is in turn necessary to sustain BTC as a store of value.

Bitcoin can only be a store of value for as long as a large decentralised network of miners continues to secure it. With each Bitcoin halving, the incentive to mine BTC for the protocol reward alone becomes less. This reward needs to be replaced by transaction fees. Bitcoin maxis always believed that payments were going to create these fees. Yet, a new wave of builders has stood up to use the Bitcoin network as a decentralised global computer for a whole range of other use cases – be it NFTs, defi, or else.

Defi is the most critical application for BTC. A store of value needs to be used in finance for it to be useful to the holder. If they can’t buy, sell, borrow, lend or collateralise the asset – it cannot succeed as a store of value. Bringing finance activity around BTC the asset on a chain is critical for BTC’s further development and adoption as a global reserve asset.

BCN: Developer awareness about Bitcoin scaling layers has been growing, and so is the demand from users for faster, cheaper, and more secure experiences. Do you believe that the Bitcoin defi ecosystem could one day catch up to or surpass the Ethereum ecosystem? If so, what key challenges would it overcome along the way?

TO: The Bitcoin DeFi ecosystem will surpass the Ethereum DeFi ecosystem without doubt. BTC is simply a much better asset than ETH, which makes it much more attractive for use in finance. This pull will create a Bitcoin decentralised finance ecosystem eventually – it’s a law of nature.

Ethereum made it very easy to deploy DeFi apps, whereas the Bitcoin blockchain is less suited for DeFi activity on L1. However, as both chains congest on L1 a lot of activity naturally moves to L2. Most of Ethereum DeFi activity is on Arbitrum and Base today. As Bitcoin DeFi activity moves to L2s, new programming capabilities can be added to BTC the asset which cancels out Ethereum’s early advantage of being able to deploy DeFi on L1.

Once Bitcoin L2s are in full swing and trusted by users, the difference between Bitcoin and Ethereum DeFi will be that Bitcoin DeFi runs on BTC whereas Ethereum DeFi runs on ETH. In that world, Bitcoin DeFi clearly wins.

BCN: Zest Protocol, an on-chain lending protocol for Bitcoin, has officially opened for users. Can you explain to an average Bitcoin HODLer what they can do with their idle BTC holdings with Zest Protocol?

TO: Today, Zest Protocol opened lending markets on the Stacks L2. That means that Stacks assets can be deployed in lending (but not BTC just yet).

Once the Stacks Nakamoto upgrade goes live with sBTC, users can seamlessly deposit BTC on the Stacks L2 – for example in Zest Protocol. Post-Nakamoto, BTC holders can earn yield or borrow stablecoins against their BTC on Zest Protocol.

BCN: Stacks is expected to undergo the highly anticipated Nakamoto upgrade soon. What is the Nakamoto upgrade about? And what would it mean to the future of Bitcoin defi, especially considering Stacks is not Ethereum Virtual Machine ( EVM) compatible?

TO: The Stacks Nakamoto upgrade is the largest upgrade to any Bitcoin Layer yet. It will enable 5-second blocks (i.e. transactions between Bitcoin blocks), Bitcoin security on the Stacks L2, and movement of BTC on the Stacks layer.

The Stacks Nakamoto upgrade will be a watershed moment for Bitcoin DeFi, because decentralised applications on Stacks can accept BTC deposits directly into their smart contracts. For Zest Protocol users, this will mean that users can start earning yield or borrow against their BTC within a single Bitcoin L1 transaction.

EVM compatibility as relevant for DeFi. Any EVM application can be written more securely in Clarity, the native programming language of the Stacks L2.

BCN: The Zest Protocol is said to be built on Stacks. This means that investors must convert their Bitcoin ( BTC) to Stacks’ pegged version of Bitcoin (sBTC) to interact with the Zest Protocol. Could you discuss the security of sBTC and whether it’s similar to Wrapped Bitcoin, which involves a centralized custodian?

TO: User’s won’t have to convert BTC into sBTC to interact with Zest Protocol. Users will simply send BTC to Zest Protocol through a wallet pop-up to open a BTC balance on Zest Protocol. What happens under the hood is that the user’s BTC is turned into sBTC on the Stacks L2 and deposited into a Zest Protocol vault contract. Once sBTC sits in the user’s vault on Zest Protocol, the user can earn yield or borrow against their BTC.

The BTC backing sBTC is held in a threshold signature script that’s controlled by the stakers of STX. As a result, there’s roughly $1bn of capital in staked STX on the line securing the mechanism of moving BTC from L1 to the Stacks L2 – that’s the highest security budget for any Bitcoin based protocol yet.

BCN: Due to the inherent limitation of Bitcoin Layer-1, most of the Bitcoin defi activity takes place on Layer-2s. Though most L2s inherit the security of the Bitcoin network, they are not battle-tested. In your opinion, what are the risks of using Bitcoin Layer-2s that users should be aware of?

TO: Most Bitcoin Layer-2s all have different bridging mechanisms. Stacks’s sBTC threshold signature method is tried-and-tested, in addition to secure from a security budget standpoint. Other L2s use custodians for their BTC, multisigs with keys held by the team, or yet unproven methods.

It would be wise for users to get deeply familiar with the way that an L2 handles deposits and withdraws of BTC onto their L2, before committing significant capital. Stay safu.

What are your thoughts about this interview? Share your thoughts in the comments secton below.