Protocols & Policy · DeFi Governance
Babylon Proposes Native Bitcoin as Collateral on Aave V4
An Aave governance proposal from Babylon Labs would let holders borrow stablecoins against BTC locked in Bitcoin vaults. It still needs a Snapshot vote and an AIP.
Babylon Labs has asked Aave's community to accept native bitcoin as collateral on Aave V4. The request is a proposal, filed Oct. 14 as an ARFC, or Aave Request for Final Comment, on Aave's governance forum (source 1). Nothing is live. The document says the next step is a Snapshot vote if the community reaches consensus, and then an Aave Improvement Proposal (AIP) "with full risk parameters included, for on-chain governance approval" (source 1).
The proposal "requests the activation of native BTC as collateral on Aave V4 via the Trustless Bitcoin Vaults (TBV) protocol," according to its summary. It would deploy "two new Aave V4 Spokes, the Babylon Spoke and the BTC Vault Swap Spoke," with native BTC as "the sole collateral asset of the Babylon Spoke." The first use, it says, is "borrowing stablecoins against native BTC" (source 1).
Babylon announced the filing on its official X account: "Today, we published an ARFC on the @aave governance forum to propose native Bitcoin to Aave V4 as collateral through Babylon Trustless Bitcoin Vaults (TBV). The proposal includes two new Aave V4 Spokes; Babylon Spoke and BTCVault Swap Spoke for borrowing and liquidation settlement, revenue sharing terms and AAVE, BABY buybacks" (source 2).
How the vaults work, by Babylon's account: a depositor locks BTC in a Taproot output on Bitcoin, and "the deposited BTC is not wrapped, bridged or held by a custodian." Moving it requires a zero-knowledge proof of an event on the host chain, Ethereum first, and a bad claim "can be challenged and stopped by an eligible challenger during a fraud-proof window" (source 1). Because Aave V4 only takes ERC-20 tokens, each vault would be represented 1:1 by "a transfer-restricted ERC-20 representation token" (source 1).
Liquidation is more complicated, because the ARFC says settlement on Bitcoin takes multiple days. Under the proposal, liquidations always seize whole vaults. In a permissionless path, the BTC Vault Swap Spoke buys seized vaults from liquidators "for wrapped BTC drawn as debt from an Aave V4 Hub in the same transaction," then holds them in escrow "for the arbitrageurs to buy and redeem" (source 1). Wrapped BTC is WBTC at launch. Borrowers who are liquidated may get part of their value back as discounted wrapped BTC rather than native BTC (source 1).
The proposal sets no risk numbers. Risk parameters for both Spokes "will be provided by Aave's risk service providers," it says (source 1).
It does set out money terms. Revenue sharing covers "Qualifying Revenue," defined as the Hub's liquidity fee on Babylon Spoke borrowers' interest plus liquidation fees, "not all interest paid by borrowers." Token purchases split "AAVE (85%) and BABY (15%)" (source 1).
| Annual revenue band | Aave DAO | Babylon | Token purchase allocation |
|---|---|---|---|
| First $500,000 | 100% | 0% | 0% |
| $500,000–$2 million | 78% | 18% | 4% |
| $2 million–$4 million | 72.5% | 22.5% | 5% |
| $4 million–$6 million | 67% | 27% | 6% |
| Above $6 million | 61.5% | 31.5% | 7% |
The ARFC says audits were done by six firms across five components, and that a re-audit by Coinspect, ABDK and Zellic is running before any mainnet deployment, with reports "shared once finalized" (source 1).
Forum user 'stani', whose profile carries an Aave Labs badge, replied 30 minutes after the filing: "Strong support from me. Native BTC is the largest pool of idle collateral in crypto, and Babylon's trustless vaults let holders borrow on Aave without wrapping or custodians" (source 3). A forum reply is not a vote.
What still has to happen, per the proposal's own next steps (source 1):
- Community feedback and risk analysis on the ARFC.
- If consensus is reached, a Snapshot vote.
- If Snapshot passes, an AIP with full risk parameters for on-chain approval.
Holding the Corner.
Not financial advice.