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Babylon proposes native Bitcoin borrowing on Aave V4

Babylon has proposed two Aave V4 Spokes for native Bitcoin collateral, with stablecoin borrowing as the first use and risk settings still subject to review.

The ChainBrief Editors

Babylon proposes native Bitcoin borrowing on Aave V4

Babylon Labs has proposed adding native Bitcoin collateral to Aave V4 through its Trustless Bitcoin Vaults protocol, with borrowing stablecoins as the first use. If approved, the plan would let borrowers access Aave liquidity while their BTC remains locked on Bitcoin.

In an October 14 proposal to Aave governance, Babylon requested two new V4 Spokes: one for borrowing against BTC and another to settle liquidations. The proposal follows an earlier temperature check, but it still requires review; Aave’s risk service providers would set the Spokes’ risk parameters.

How would borrowers use native BTC on Aave?

Borrowers would lock BTC in a Taproot UTXO and use the resulting vault as collateral on Aave V4, according to Babylon’s Aave governance proposal. The BTC would not be wrapped, bridged or held by a custodian. Redemption would follow on-chain rules and settle to a Bitcoin UTXO.

Aave V4 accepts ERC-20 collateral, so the integration would use an internal, transfer-restricted ERC-20 record to represent each vault at a 1:1 ratio. The proposal says the record could move only among specified Aave contracts; it would not be a token users could hold or trade. On the Babylon Spoke, borrowers would draw supported assets from an Aave Hub, with native BTC as the Spoke’s sole collateral asset.

How would liquidation work across Bitcoin and Ethereum?

The second Spoke is designed to let liquidators settle positions on Ethereum without waiting for BTC redemption on Bitcoin. Under the proposal, a liquidator could exchange a seized vault for WBTC from an Aave Hub. The vault would then sit in escrow while an arbitrageur repays the WBTC debt and completes redemption on Bitcoin.

That route addresses a timing gap: the proposal says Bitcoin redemption includes a multi-day claim challenge window, while liquidation needs a settlement path on Aave. The design also accounts for Bitcoin UTXOs being indivisible: liquidations seize whole vaults, and the proposal describes mechanisms for handling collateral value left over after debt repayment.

What remains before the plan could launch?

The proposal asks Aave’s DAO to onboard the collateral and Spokes, but launch settings are not final. The DAO would control the listed collateral and borrowable assets, caps, interest-rate strategy, liquidation settings and oracle configuration. Babylon’s proposal also includes revenue sharing: the first $500,000 of qualifying protocol fees each year would go entirely to Aave DAO; later revenue bands would be split among the DAO, Babylon and token purchases.

Babylon’s integration documentation describes the adapter and collateral record as the link between Bitcoin vaults and Aave positions. The governance proposal is a request to advance that design through review, not an approval to activate it.

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