May 13 (Reuters) - Zest Protocol, a bitcoin lending startup with just six employees, has secured $3.5 million in a funding round led by billionaire investor Tim Draper.

Besides venture capital firm Draper Associates, nearly a dozen investors participated in the round, including Binance Labs and Flow Traders, the company said on Monday.


The fundraise marks confidence building up in the crypto lending industry amid a crackdown from the U.S. Securities and Exchange Commission.

Zest operates differently than the firms targeted by the regulator, its founder Tycho Onnasch said. While most such lending platforms operated as a financial institution, Zest is decentralized, he said.

Decentralized firms allow peer-to-peer transactions without the need for an intermediary.


Zest will allow users to lend out their bitcoin, or borrow against it. Users can avoid selling their bitcoin and instead earn a passive income from it.

The company will use the funds to roll out the platform more broadly later this year.

Onnasch said the yield-generating strategy is "very conservative", suggesting the company will adopt a more mature approach compared to peers that offered yields as high as 20% during the Wild West era of crypto.


"I don't want to just hold bitcoin — I want to use it," Draper said in a statement. "I've ran many experiments to deploy bitcoin productively, but it hasn't been easy."

"Bitcoin is becoming an institutional asset. There's a bitcoin economy that is emerging," Onnasch said in an interview. (Reporting by Niket Nishant in Bengaluru; Editing by Shilpi Majumdar)