Babylon Proposes Native Bitcoin as Collateral on Aave V4, Ending the Need to Wrap or Bridge BTC

Published October 15, 2026, 13:15 UTC. Based on Babylon Labs' proposal on the Aave governance forum, and reporting by Cointelegraph, CryptoTimes and TokenPost.

Babylon Labs has submitted a formal proposal to bring native Bitcoin collateral to Aave V4, letting users lock real BTC on the Bitcoin network and borrow stablecoins against it without ever wrapping, bridging or handing custody to a third party. The Aave Request for Comment (ARFC) was published on the Aave governance forum on October 14, 2026, and lays out the full technical design for the integration.

Two new spokes, one collateral asset

The proposal would deploy two new Aave V4 Spokes: the Babylon Spoke and the BTC Vault Swap Spoke. According to the ARFC, native BTC would be listed as the sole collateral asset on the Babylon Spoke, and the first supported use case would be borrowing stablecoins against that collateral. Aave DAO would retain full governance control over both Spokes, including asset listings, borrowing limits, interest rate strategies, supply and borrow caps, and liquidation settings. Risk parameters would be supplied by Aave's risk service providers, and the DAO could freeze or pause each Spoke's assets individually.

The Babylon Spoke itself is a variant of the standard Aave V4 Spoke written by Aave Labs, differing mainly in liquidation and collateral registration: only the Babylon adapter, acting as the Spoke's liquidation manager, can liquidate positions on it, and each liquidation call targets a single vault. A separate 2-of-3 multisig made up of Llama Risk, Babylon Labs and Aave Labs would handle configuration of the BTC Vault Swap Spoke.

BTC stays on Bitcoin: how Trustless Bitcoin Vaults work

Under the Trustless Bitcoin Vaults (TBV) protocol, a depositor locks BTC inside a Taproot script on the Bitcoin network, and redemption is governed by on-chain rules enforced with zero-knowledge proofs. The proposal states that the deposited BTC is not wrapped, bridged or held by a custodian: a claim on the vault's BTC requires a valid proof of an event on the host chain, and any fraudulent claim can be challenged and stopped during a fraud-proof window. Depositors can run their own vault provider, which removes the need to trust any third party with the coins.

Because Aave V4 only accepts ERC-20 tokens as collateral, the BTCVaults are represented on Ethereum by a transfer-restricted ERC-20 token minted 1:1 at activation. The proposal is explicit that this token is an internal accounting unit, not a BTC wrapper: it cannot be transferred between users, traded, or held anywhere outside the integration. It carries no admin, is not upgradeable, and its supply always equals the BTC locked in active positions. Minting and burning are restricted to the adapter contract.

The design also solves the liquidation puzzle. When a position is liquidated, the liquidator swaps the acquired BTCVaults through the BTC Vault Swap Spoke for wrapped BTC at the oracle rate minus a sell discount, drawing the wrapped BTC from an Aave V4 Hub. Arbitrageurs, a permissioned set with redemption rights, later buy the escrowed vaults by repaying that debt and redeem the BTC on Bitcoin itself. The mechanism borrows WBTC, Aave's largest BTC reserve, at launch, which the proposal notes is presently underutilized on the borrow side.

Why native beats wrapped

Aave already supports loans against tokenized Bitcoin through Wrapped Bitcoin (WBTC) and Coinbase Wrapped Bitcoin (cbBTC). As Cointelegraph noted, those wrapped tokens rely on custodians to hold the underlying Bitcoin, introducing counterparty risks that this proposal is designed to eliminate. The proposal frames native BTC as a composable primitive for the broader BTC DeFi ecosystem, with other projects able to build new BTC-collateralized products on top and extend Aave's reach into Bitcoin-native DeFi.

The infrastructure partner HashKey Cloud plans to integrate Babylon's vaults, allowing its clients to borrow stablecoins against locked Bitcoin without custodians, according to CryptoTimes. Babylon itself is best known for its Bitcoin staking protocol, which launched in August 2024 and has activated more than 100,000 BTC cumulatively, with roughly 40,772 BTC (about $3.37 billion) currently staked, according to the proposal. The company was founded in 2022 by Stanford professor David Tse and Dr. Fisher Yu, and has raised more than $110 million from investors including a16z, Paradigm and Polychain, according to the proposal.

The path to a vote: 320,000 AAVE votes needed

The ARFC follows an initial submission on May 25 and a preliminary community Temperature Check that passed on June 10, according to Babylon Labs. The proposal is now at the Aave Request for Comment stage, where it faces community feedback and risk analysis. If consensus is reached, it proceeds to a three-day off-chain Snapshot vote, which requires at least 320,000 AAVE-equivalent votes in favor before it can advance to a formal on-chain vote, according to Aave's governance rules. The on-chain vote must then meet quorum and approval requirements.

Aave DAO gets the first $500,000

Under the proposal's economics, Aave DAO would receive the first $500,000 in qualifying annual revenue generated by the integration. On top of standard Aave interest, the adapter can also charge a Babylon interest fee, a percentage of the borrower's base Aave interest, collected on repayment. Babylon says the TBV protocol's cryptography, called BaBe, makes SNARK proof verification on Bitcoin roughly 1,000 times cheaper than prior approaches, and the underlying research was developed jointly with UC Berkeley and is set to appear at CCS 2026, a leading security conference.

This article is news reporting and is not investment advice.

Sources

• Babylon Labs, [ARFC] Onboard Native BTC as Collateral to Aave V4 via Babylon Trustless Bitcoin Vaults, Aave governance forum, October 14, 2026, primary source for the proposal's full design, the two Spokes, the TBV mechanics, the liquidation flow, the revenue terms and the staking protocol statistics
• Cointelegraph, October 15, 2026, secondary coverage: the May 25 submission and June 10 Temperature Check timeline, the $500,000 revenue allocation, the WBTC and cbBTC custodian context, the ARFC stage, and the Snapshot and on-chain vote requirements
• CryptoTimes, October 14, 2026, secondary coverage: the Babylon Spoke and BTC Vault Swap Spoke roles, the stablecoin-first borrowing use case, the HashKey Cloud integration, the 2-of-3 multisig governance and Aave DAO's retained control
• TokenPost, October 14, 2026, secondary coverage: the transfer-restricted Ethereum representation token, the vault mechanics keeping BTC on Bitcoin, and the vote sequencing