Babylon proposes native Bitcoin collateral for Aave V4

Babylon Labs proposed on Oct. 14 that Aave V4 let users borrow stablecoins against native Bitcoin, with BTC locked in vaults on the Bitcoin network. The proposal posted to Aave’s governance forum says the first use would use native BTC as collateral.

How would Bitcoin back an Aave loan?

Under Babylon’s plan, users would lock BTC in a Taproot vault on Bitcoin and borrow eligible assets from Aave V4. The proposal says the BTC would not be wrapped, bridged or held by a custodian.

Aave V4 accepts ERC-20 collateral, so the design uses a transfer-restricted token as an internal accounting unit for each vault. Babylon says that token could not be transferred, traded or held outside the integration, and its supply would match BTC locked in active positions.

The proposal includes two Aave V4 components: a Babylon Spoke for borrowing against native BTC, and a BTC Vault Swap Spoke for liquidations. Because BTC redemption can take multiple days, the second component would let liquidators receive wrapped BTC while arbitrageurs handle vault redemption. WBTC is proposed for that role at launch.

What approvals are still needed?

The proposal remains at the Aave Request for Comment stage. Babylon lists community feedback and risk analysis as the next steps, followed by a possible Snapshot vote and an onchain Aave Improvement Proposal if the Snapshot passes.

Risk service providers are to set the parameters for both Spokes, including supply and borrowing caps, interest rates and liquidation rules. Babylon says it is also re-auditing finalized changes before mainnet deployment, with follow-up reports to be shared when ready.

Cointelegraph’s report on the proposal also says it still needs further votes and security reviews before launch. No launch date or final risk settings are confirmed in the proposal.

Source material

• proposal posted to Aave’s governance forum — governance.aave.com
• Cointelegraph’s report on the proposal — cointelegraph.com