Bitcoin holds the crown as the largest cryptocurrency by market value, yet the vast majority of it remains idle. Research from Spark revealed that in May 2026, only 91,332 BTC resided across Bitcoin layer-2 networks—representing roughly 0.46% of the circulating supply. Factoring in every wrapped token and all Babylon staking pushes that proportion up to a mere 0.8% or so.
Holders wishing to put their BTC to work typically rely on wrapping. A custodian holds the actual coins, while a token such as WBTC acts as a stand-in on Ethereum (ETH). Consequently, any loan secured by that token relies entirely on the continued reliability of the custodian and its redemption mechanism.
An August 2024 announcement served as a reminder of this dependency when BitGo revealed plans to transition WBTC custody into a joint venture with BiT Global, an entity linked to Justin Sun.
At that time, risk manager Chaos Labs reported that Aave’s Ethereum market contained roughly $2.2 billion in supplied WBTC. Coinbase took an even stronger stance, delisting WBTC in December 2024. Following a lawsuit filed by BiT Global over the removal, court documents from Coinbase highlighted the risk that control might “fall into the hands of Justin Sun.”
Zest Protocol, operator of a Bitcoin lending market on Stacks, is currently testing an alternative approach that leaves native coins on the Bitcoin network. On September 23, the protocol introduced a capped mainnet demo of its Bitcoin Collateral Vaults, allowing users to secure loans on EVM chains without wrapping their BTC.
How a Vault on Bitcoin Backs a Loan on EVM Chains
According to the company, Bitcoin Collateral Vaults function as self-custodial vaults situated on Bitcoin L1. Spending permissions are governed strictly by Bitcoin’s native protocols, with an architecture designed to accommodate BitVM proof verification.
Documentation specifies that each vault belongs to a single user, preventing the pooling of coins across different accounts. Every vault takes the form of a Taproot output featuring spending paths locked in at the time of deposit, which restricts where the underlying BTC can travel.
The borrowing process occurs on an EVM chain—Ethereum for the current demonstration—where the Bitcoin vault is mirrored by a distinct collateral record. Borrowers utilize this record to draw USDC from an integrated lending market while their BTC remains securely locked in the vault.
Positions are flexible and can be adjusted after opening. If the price of Bitcoin climbs, borrowers can supply additional collateral or withdraw excess funds. Furthermore, liquidations can be executed partially to settle a predetermined sum while the remainder of the BTC is returned to the vault, a feature Zest notes is unavailable in alternative vault architectures that only support full collateral release.
The system also accounts for potential failure of the destination chain. Should that chain permanently go offline, depositors retain the ability to reclaim eligible BTC once a Bitcoin timelock expires. This recovery process requires solely the user’s private key and publicly available vault data, operating independently of any signature from Zest.
“We’ve spent five years on programmable Bitcoin, first on Stacks and now on Bitcoin itself. Today you can put real BTC in a vault on Bitcoin and borrow against it on mainnet,” said Tycho Onnasch, founder of Zest Protocol.
Pending the completion of external audits, individual wallets remain subject to collateral caps before Zest proceeds with a full production launch.
Guardians Stand Watch Until BitVM Takes Over
While Bitcoin enforces the spending constraints of each vault, individual settlements still require separate verification. Zest states that independent guardians will oversee these checks during the initial production phase.
When events like loan repayments or liquidations take place on the lending chain, an attestation initiates a settlement pre-authorized by the borrower. Guardians review these transactions, and a designated quorum possesses the authority to reverse invalid payouts during an active contest window.
Any reversed BTC flows back to the specific vault designated by the rules. Documentation emphasizes that once a vault is established, no operator can introduce new outcomes, alter amounts, or redirect funds.
Eventually, Zest intends to transition this verification duty to BitVM, a framework that enables computation checks on Bitcoin without altering consensus rules. Under this upcoming design, any party claiming a repayment or liquidation must submit their claim directly to the Bitcoin network.
Challengers are then given a defined period to dispute the claim, forcing the claimant to provide a zero-knowledge proof. Should the proof prove invalid, the challenger can successfully block the withdrawal. Project documentation highlights that overall security ultimately relies on the specific construction chosen by Zest alongside the active participation of honest challengers.
Zest highlights published BitVM3 benchmarks indicating onchain expenses below $100. However, these figures rely on specific underlying assumptions, contrasting with older architectures that incurred costs running into the thousands.
A Rival Design Puts Zest’s Guardians Under the Spotlight
Zest operates alongside several other teams seeking to keep BTC collateral anchored directly to the Bitcoin blockchain. In May, Babylon Labs unveiled a comparable vault architecture for Aave V4, also constructed using Taproot outputs. Babylon’s framework specifies that redemptions rely entirely on zero-knowledge proofs and challenge mechanisms, eliminating any reliance on custodians or signer groups with discretionary authority over the BTC.
Conversely, Zest’s initial production phase depends on guardians until its proprietary BitVM verification goes live. The enterprise has not yet revealed the identities of these guardians or the exact size of the quorum required, nor has it clarified the duration of liquidation timelocks or contest windows.
Both models encounter identical operational hurdles. A commenter on Babylon’s Aave proposal raised questions regarding how liquidations would fare during periods of severe market volatility, while also querying challenger incentives and the expected timeline for Bitcoin redemptions. Zest’s vaults will confront these exact inquiries once current caps are removed.
For holders who have consistently avoided wrapped assets, demanding the public disclosure of these guardians may precede locking up funds beyond a basic test amount.