Babylon Labs has submitted a temperature check proposal to the Aave Governance Forum to introduce native Bitcoin collateralized lending on Aave V4. Under the proposal, users will be able to lock BTC directly on the Bitcoin network and borrow assets via Aave V4 on Ethereum, without relying on wrapped BTC, cross-chain bridges, or custodians.
The plan revolves around two Spoke systems.
The proposal seeks community approval for two customized Aave V4 Spokes, integrated with Bitcoin via Babylon’s Trustless Bitcoin Vaults (TBV) system. Babylon states that the underlying BTC will remain on the Bitcoin network, with users locking their assets using Taproot-based vault scripts.
Aave founder Stani Kulechov has publicly endorsed the proposal on X, calling it the first new Spoke implementation proposal for Aave V4. He also noted that Babylon currently has over $4 billion in BTC staked, and these assets could potentially enter the Aave ecosystem as a source of collateral.
Do not use wrapped BTC or custodial structures
Babylon repeatedly emphasizes in its proposal that this integration solution does not rely on cross-chain bridges, wrapped BTC issuers, custodians, or multisignature signer groups. Instead, the system will use Taproot scripts, challenge windows, and zero-knowledge proofs to verify the collateral redemption process under cross-chain conditions.
The scheme also introduces a non-transferable accounting asset, vaultBTC, to represent BTC collateral positions locked in Babylon vaults. Babylon states that vaultBTC is not a traditional wrapped Bitcoin token and can only interact with approved Aave contracts.
Aave V4 for isolated lending
The proposal suggests that Aave V4’s hub-and-spoke architecture is well-suited to host such customized, isolated lending systems while minimizing impact on other parts of the main protocol. In addition to the lending spoke, Babylon also proposes a separate BTC Vault Swap spoke to handle liquidations and Bitcoin settlement delays.
From a goal perspective, this design aims to bring Bitcoin liquidity into the Ethereum DeFi market while minimizing trust dependencies and reducing reliance on centralized custodial infrastructure. The proposal is currently in the governance discussion phase and will require further review, auditing, risk assessment, and on-chain voting before it can be officially deployed.