Introducing Bitcoin Collateral Vaults
Zest Protocol is the capital layer for Bitcoin, turning Bitcoin from an idle asset into productive capital.
Bitcoin Collateral Vaults let holders use BTC as collateral while it remains in a vault on Bitcoin. Holders can borrow stablecoins against it on a destination chain without wrapping or bridging their BTC.
The Problem
Bitcoin is the strongest collateral asset ever created, yet putting it to work has required a trade.
Institutional borrowers can place BTC in segregated accounts with qualified custodians and borrow through managed lending agreements. That model works at scale, but its cost, onboarding and operational requirements put it beyond most holders.
The common onchain alternative is to wrap or bridge BTC into a token on another chain. The holder can then use that representation in DeFi, but the holder depends on the custody and redemption system behind the wrapped asset.
Bitcoin Collateral Vaults create another path: the BTC stays on Bitcoin while its value works elsewhere.
How Bitcoin Collateral Vaults work
A holder deposits BTC into a Taproot vault on Bitcoin. The vault fixes the permitted settlement paths when it is created, limiting where the BTC can move.
A collateral record on the destination chain represents that specific Bitcoin vault. The holder can use it to borrow stablecoins from a connected lending market while the underlying BTC remains on Bitcoin.
The BTC is not pooled or commingled with other users’ BTC. Each position remains tied to its own Bitcoin vault.
Bitcoin Collateral Vaults keep BTC in a customer-specific vault with spending conditions enforced on Bitcoin. Even if Ethereum goes down and never comes back online, the customer can recover eligible BTC still in the vault after its Bitcoin timelock, using their own key and public vault information.
How did Bitcoin Collateral Vaults become possible now?
Recent advancements in BitVM have made it possible to build a future of self-custodial yet fully programmable BTC collateral.
The Zest Protocol team has been building in the Bitcoin lending space since 2021. The team was amongst the first users of wBTC on Aave, but quickly realised that this approach wouldn’t unlock the full potential of Bitcoin as the world’s most pristine collateral asset.
We joined Trust Machines in 2021 to work with Stacks Founder Muneeb Ali on bringing fully programmable smart contracts to Bitcoin through Stacks. We tinkered endlessly with Discreet Log Contracts (DLCs), FROST-enabled signer networks, and ended up spinning Zest Protocol out with the backing of Tim Draper’s Draper Associates and YZi Labs to build our lending markets on Stacks.
Introduced in 2023, BitVM changed the landscape. For the first time, it became possible to verify arbitrary computations on Bitcoin without a consensus change. That opened a path to checking zero-knowledge proofs through a Bitcoin-enforced challenge protocol. A vault’s spending conditions could be enforced by cryptographic proof of smart contract state on an external chain, not by a signer committee.
The engineering has moved fast since then. Published BitVM3 benchmarks report on-chain costs below $100 under their stated assumptions, compared with costs in the thousands for earlier constructions. This progress brings practical proof-based verification closer.
Bitcoin Collateral Vaults hold BTC collateral in a UTXO on the Bitcoin base layer. In the planned BitVM phase, cryptographic proofs establish the DeFi-chain events that justify settlement. When a borrower repays or gets liquidated on Ethereum in that phase, a cryptographic proof of that event is submitted through the Bitcoin challenge protocol. If the proof is valid, the BTC is released. If not, anyone can challenge it and block the withdrawal. This is the future of on-chain BTC backed lending.
We understood the potential of Bitcoin Collateral Vaults in summer 2025 and have been building in stealth since.
We announced a working mainnet prototype of Bitcoin Collateral Vaults in May 2026 and are accelerating towards production deployment.
Understanding Bitcoin Collateral Vaults
Bitcoin Collateral Vaults are designed to minimise trust in Bitcoin-backed lending. The first production phase combines customer-authorized transactions with independent guardian enforcement. The BitVM end state develops this protection toward proof-based verification and an open challenger network.
The mechanism is elegant. A user locks BTC into a Taproot UTXO on Bitcoin L1. The conditions under which that BTC can move are fixed at deposit and enforced by Bitcoin consensus itself: no operator can add an outcome, alter an amount, or redirect a payout under those signatures. In the first production phase, event attestations activate a transaction the customer authorized, and independent guardians check its settlement. A guardian quorum can reverse an invalid payout during the contest window, returning the contested BTC to the prescribed vault.
Unlike designs where a Bitcoin vault can only ever be released in full, Zest Protocol’s Bitcoin Collateral Vaults are divisible: the protocol settles at exact amounts against a single UTXO, on Bitcoin, in native BTC.
The result is a flexible BTC-backed borrowing experience. Borrowers can top up Bitcoin Collateral Vaults or withdraw excess collateral as Bitcoin appreciates, with updated coverage for the continuing position. A covered partial liquidation allocates the pre-authorized settlement amount. The remainder returns to the vault in native BTC. And perhaps most importantly, the borrower can recover eligible BTC still in the vault after its Bitcoin timelock using their ordinary Bitcoin key and public vault information, without a protocol signature.
In the BitVM phase, verification runs through an optimistic challenge protocol. To withdraw, a party posts a claim transaction on Bitcoin asserting that the relevant event has occurred (loan repayment for the borrower, liquidation breach for the liquidator). Any counterparty has a defined window to challenge. On the happy path, no challenge is raised and the withdrawal completes after the window with the transaction count and fees defined by the chosen construction.
If a claim is challenged, the claiming party must post a signed ZK proof of the asserted event. The proposed challenge construction makes signed invalid proofs self-incriminating, allowing a challenger to block the withdrawal. Its security depends on the selected construction and an honest challenger able to act within the window.
The implications are concrete.
The aim is for a Bitcoiner with 0.1 BTC to borrow stablecoins from connected lending markets while retaining customer-authorized control of the BTC. Bitcoin Collateral Vaults extend access beyond specialist custodial agreements, with each market setting its supported amounts and access terms.
If the destination chain goes offline and never comes back, eligible BTC still in the vault remains recoverable after its Bitcoin timelock. The depositor uses their own Bitcoin key and public recovery information, with no signature from the protocol required.
This is what Bitcoin-collateralised lending is supposed to look like. BTC stays on Bitcoin, while stablecoins flow from where the liquidity already is. Bitcoin enforces the spending conditions. Independent guardians enforce settlement policy in the first production phase, with BitVM verification as the next step.
To dive deeper into the path to mainnet check out How Zest Protocol brings Bitcoin Collateral Vaults to mainnet. For further technical details and integration opportunities with Bitcoin Collateral Vaults, contact the Zest Protocol team.