Babylon Moves Native Bitcoin Lending Proposal Forward
Babylon Labs has advanced a governance proposal to bring native Bitcoin collateral to Aave V4, potentially allowing users to borrow stablecoins against BTC without transferring the underlying Bitcoin to another blockchain.
The proposal would let users lock Bitcoin in vaults on the Bitcoin network while accessing borrowing services through Aave. An associated non-transferable token on Ethereum would represent the collateral position, connecting Bitcoin held on its native blockchain with Aave’s lending infrastructure.
The proposal is not yet approved for launch. It has reached the Aave Request for Comment (ARFC) stage, where community members can review the design, provide feedback and assess the associated risks before the process advances to further governance votes.
How Babylon’s Proposed Bitcoin Collateral System Would Work
Under the proposed design, users would deposit and lock BTC in vaults operating on the Bitcoin network. Rather than bridging the Bitcoin itself to Ethereum or converting it into a conventional wrapped asset, the system would use a non-transferable Ethereum token to represent the locked collateral.
This structure is intended to connect native BTC holdings with Aave’s lending markets. If implemented, eligible users could use their Bitcoin position to borrow stablecoins, subject to the final integration design, risk parameters and governance approval.
The distinction from wrapped Bitcoin is important. Assets such as Wrapped Bitcoin (WBTC) and Coinbase Wrapped Bitcoin (cbBTC) represent Bitcoin on other blockchain networks. Their underlying BTC is held through arrangements involving custodians or other asset-control mechanisms. Babylon’s proposal instead aims to keep the underlying Bitcoin on its native network while enabling its use as collateral elsewhere.
Aave Already Supports Tokenized Bitcoin Collateral
Aave already offers lending markets that support tokenized Bitcoin assets, including WBTC and cbBTC. These assets allow users to access decentralized finance applications on supported networks without conducting every transaction directly on Bitcoin.
However, wrapped assets can introduce counterparty and custody-related risks because users depend on the mechanisms responsible for holding and representing the underlying BTC. The precise risks vary by asset and its custody or backing arrangements.
Babylon’s proposed integration seeks to provide another route for Bitcoin holders to access decentralized lending. Keeping BTC on its native blockchain could reduce reliance on conventional wrapped representations, but it does not automatically eliminate every technical, operational or security risk. The vault design, collateral representation and integration with Aave would still require careful review.
Aave DAO Could Receive the First $500,000 in Qualifying Revenue
The proposal includes a revenue-sharing provision for Aave DAO, the decentralized governance organisation responsible for decisions about the protocol. Under the proposed terms, Aave DAO would receive the first $500,000 in qualifying annual revenue generated by the integration.
This provision forms part of the proposed arrangement between the participants and would be subject to the proposal’s final terms and approval. It should not be interpreted as revenue already earned or guaranteed, because the integration has not yet completed the governance process.
The proposal follows an earlier community temperature check submitted on May 25. That preliminary vote passed on June 10, after which the proposal progressed toward the current ARFC stage. A temperature check indicates community sentiment but does not, by itself, constitute final approval to deploy the integration.
What Governance Steps Remain Before Launch?
The proposal must pass additional governance and review stages before the integration can move forward. At the ARFC stage, community members can examine the proposal, raise concerns and evaluate the design and risk considerations.
If sufficient community consensus develops, the proposal can proceed to a three-day offchain Snapshot vote. The supplied proposal details specify that at least 320,000 AAVE-equivalent votes in favour are required for it to advance to a formal onchain vote.
The onchain vote must then meet the applicable quorum and approval requirements. Aave’s governance voting guide explains the protocol’s voting process. Passing an earlier discussion or preliminary vote does not guarantee that a proposal will clear the remaining stages.
Security Reviews Remain Important
Native Bitcoin collateral introduces design considerations that differ from conventional token-based lending. The system must connect Bitcoin locked on its own blockchain with a collateral position recognised by Aave on Ethereum. The integrity of that connection is essential to ensuring that borrowing and collateral accounting work as intended.
Risk analysis will therefore be an important part of the review. Community members and relevant risk specialists will need to evaluate the vault mechanism, collateral verification, operational dependencies and the consequences of potential failures. The final implementation and its risk parameters will determine how the system handles borrowing limits and other lending-market protections.
The proposal’s current status means these matters should be treated as areas for review rather than as proof that the integration is ready for unrestricted use.
What the Proposal Could Mean for Bitcoin in DeFi
If approved and implemented, Babylon’s proposal could give Bitcoin holders another way to access decentralized lending without converting their BTC into a conventional wrapped token. Borrowing against Bitcoin could allow users to obtain stablecoins while retaining exposure to their underlying holdings, although borrowing also introduces liquidation and collateral-management risks.
For Aave, the proposal would expand the range of collateral arrangements considered for its lending infrastructure. For Babylon, it represents an effort to connect Bitcoin’s native asset with Ethereum-based DeFi applications.
The next milestones are community feedback, risk assessment and the required governance votes. Until those stages are completed, native BTC-backed borrowing through this proposed Aave V4 integration remains a prospective feature rather than a confirmed live service.
