Babylon proposes native Bitcoin collateral for Aave V4

Babylon Labs has asked Aave’s community to let users borrow stablecoins against native Bitcoin on Aave V4, which could make BTC usable as loan collateral without wrapping or bridging it. The proposal, posted to the Aave governance forum on Oct. 14, is open for community feedback. It has not been approved.

The plan would add two Aave V4 markets, called Spokes: a Babylon Spoke for borrowing against BTC, and a BTC Vault Swap Spoke to handle collateral after liquidation. Risk service providers would set the markets’ risk parameters. If the community reaches consensus, the next steps are a Snapshot vote and then an on-chain governance proposal, according to Babylon Labs.

How would BTC work as collateral on Aave?

Users would lock BTC in a Taproot vault on the Bitcoin network. A Taproot vault is a Bitcoin output with spending rules built into its script. Those rules govern when and where the BTC can be redeemed.

Aave V4 accepts ERC-20 tokens as collateral, so the proposal uses an internal accounting token to record the locked BTC. Babylon’s Aave V4 integration documentation says that record tracks BTC 1:1, has eight decimal places, and cannot be transferred or traded outside the integration. It is not a wrapped Bitcoin token.

The borrower could draw supported assets from Aave’s lending pool. The proposal’s first use case is borrowing stablecoins against BTC. The assets available to borrow, and how much users could borrow, would depend on Aave’s market settings.

What happens if a borrower cannot repay?

The proposal lets liquidators take whole BTC vaults from an undercollateralized position. Because BTC redemption can take days, the BTC Vault Swap Spoke would give liquidators wrapped BTC for the vault, with WBTC planned at launch. Arbitrageurs would later buy the escrowed vault and redeem the BTC on Bitcoin.

The proposal says the BTC would stay on Bitcoin and would not be held by a custodian. Redemption would follow on-chain rules and require proof of an Aave event, such as a loan being repaid. The proposal also describes a challenge process to stop an invalid redemption claim.

What still needs approval?

Aave’s community must review the plan and its risks before any launch. If it advances, Aave DAO would set or approve key market settings, including borrowing limits, liquidation rules, and which assets users can borrow. Babylon says the proposal’s risk parameters will come from Aave’s risk service providers.

That means the forum post is a request to add the markets, not an announcement that native BTC borrowing is live on Aave V4. The proposal says a positive Snapshot result would be followed by an on-chain governance vote before deployment.

References

• Aave governance forum on Oct. 14 — governance.aave.com
• Aave V4 integration documentation — docs.babylonlabs.io