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In DeFi, access to credit often depends on tokenized assets or custodial arrangements. Babylon Labs wants to change this logic with a proposal submitted to Aave’s governance. The project aims to allow Bitcoin holders to borrow on the V4 version without a bridge, without a classic wrapper, and without a centralized custodian. This initiative is still progressing in stages, with a first community sentiment vote.
In brief
- Babylon Labs proposes to integrate native bitcoin into Aave V4 as collateral, without going through bridges, wrappers or custodians.
- The mechanism relies on Trustless Bitcoin Vaults and a technical representation called vaultBTC.
- The proposal includes two modules on Ethereum to manage borrowing and liquidations via WBTC.
- If governance validates the next steps, this integration could expand the use of native BTC in DeFi.
Babylon Labs has submitted a “Temperature Check” to the DAO of Aave to test the reception of its architecture. The core of the proposal rests on Trustless Bitcoin Vaults, vaults designed to lock BTC directly on their origin chain. The depositor therefore retains a native exposure while creating a corresponding record on Ethereum.
The described mechanism uses Taproot scripts and UTXO outputs. Once the funds are locked, adapter contracts represent the vault as vaultBTC. This token does not circulate freely: it remains limited to the V4 Hub, the Core Lending Spoke, and the integration contract. This restriction aims to prevent a representation asset from becoming a transferable instrument outside the intended framework.
This approach gives Bitcoin a more direct role in decentralized lending. It also avoids models where the user must go through a bridge, a signatory consortium, or a wrapped asset before borrowing. In this scheme, Bitcoin remains on its chain, while credit is handled in the DeFi environment.
Aave V4 at the center of a Hub-and-Spoke architecture
The proposal provides for two new Spokes on Ethereum. The Babylon Core Lending Spoke would allow borrowing of supported assets, such as stablecoins or wrapped BTC, with native collateral. The BTC Vault Swap Spoke would then handle liquidations, converting seized collateral into WBTC for permissionless liquidators.
Aave V4 currently only accepts ERC-20 tokens as collateral. For this reason, vaultBTC serves as a technical representation between the origin chain and the lending environment. The system maintains a direct correspondence between each vault and its restricted token, which regulates operational functioning.
The role of governance remains central. The Aave V4 Hub, supply caps, borrowing caps, risk parameters, and overall supervision remain under control of the Aave DAO. Babylon Labs also indicates that details on oracles, trust assumptions, and complete risk management will come in a later ARFC stage.
Liquidations, WBTC and next governance steps
The proposal also describes a specific circuit for liquidations. When a Bitcoin-collateralized position is liquidated, a permissionless actor swaps the seized vault for WBTC with a slight premium. Then, authorized arbitrageurs buy these escrowed vaults, repay the debt, and retrieve the native funds on the origin chain.
This setup separates the moment of liquidation from the final BTC buyback. Thus, liquidators can settle faster while the process related to Bitcoin follows its own schedule. Babylon Labs also presents this model as a way to create new borrowing demand for WBTC already present on the platform.
The project is undergoing audits from Coinspect, Sherlock, Zellic, ABDK, and ZK Security. Runtime verification also conducts a formal verification. The first reactions cited in the governance thread seem favorable, notably among technical contributors and actors related to Aave Labs.
If the sentiment vote confirms this reception, the file will move to the ARFC stage, then possibly to an AIP on-chain vote. At this stage, the challenge will be to more finely evaluate risks, economic parameters, and technical guarantees. If governance validates these steps, Bitcoin could gain a more direct place in DeFi credit markets, without immediately changing the expected prudential rules of the protocol.
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Journaliste et rédacteur web passionné par l’univers des cryptomonnaies et des technologies Web3. J’y traite les dernières tendances et actualités afin de proposer un contenu de haute qualité à un large public du secteur.
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The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.