Bitcoin Liquid Staking Comes to Zest Protocol on Stacks With BTCz

With staking becoming a reality for Bitcoin’s own layer-1, you’ll just as soon be able to trade liquid staking tokens on Bitcoin layer-2 networks.

Zest Protocol, a Bitcoin decentralized finance (DeFi) service available on Stacks, announced the launch of BTCz on Thursday—a BTC equivalent that will earn yield for holders through the fast-rising Babylon staking system.

“The BTC yield comes from Babylon staking or other BTC staking protocols that might launch in the future,” said Tycho Onnasch, co-founder of Zest Protocol, to Decrypt.

Babylon Labs told Decrypt last week that its protocol will allow users to stake their BTC to secure multiple external blockchains at once—including the burgeoning ecosystem of Bitcoin L2s currently in development.

During that interview, Babylon co-founder David Tse expressed excitement over liquid staking, which he believes will garner massive popularity as it has in the Ethereum economy.

According to Onnasch, Zest’s relationship with Babylon is similar to EtherFi’s relationship with EigenLayer on Ethereum.

“Zest users deposit BTC to get BTCz in return,” he continued. “BTCz appreciates over time in value versus BTC, as the BTC accrues in the amount of BTC backing BTCz (similar to stETH).”

The security guarantees of BTCz will be enhanced by Stacks—the Bitcoin L2 on which BTCz circulates—thanks to the ability of Stacks smart contracts to read Bitcoin state. As such, Zest Protocol’s contract can independently verify staking balances on Bitcoin L1 through Babylon, no oracle messaging service or third party required.

BTCz will further decentralize as Stacks rolls out its pegged BTC asset “sBTC” in the coming weeks as a follow-up to its long-awaited Nakamoto upgrade. sBTC is a decentralized, bridged version of BTC that is secured by decentralized network users who “stack” their STX tokens.

“BTCz is set to become sBTC’s yield-bearing cousin on Stacks,” said Onnasch. “This is just the start of the rollout of our BTC yield products on Zest Protocol Earn.”

The Zest lending protocol currently has $25.46 million total value locked (TVL), according to DeFi Llama.