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Babylon advances native Bitcoin collateral proposal for Aave V4

Babylon has put native BTC collateral on Aave V4’s governance agenda, with two Spokes and risk review still to clear before any launch can proceed.

The Top Crypto Editors 2 min read

Babylon advances native Bitcoin collateral proposal for Aave V4

Can you borrow on Aave V4 against Bitcoin that stays on Bitcoin? Babylon Labs has moved that proposal to Aave’s Request for Comment stage, where the community can review the design and its risks before any launch is approved. In its Aave governance proposal, Babylon says users would lock BTC in Taproot outputs and borrow against it through two new Aave V4 Spokes.

How would native BTC work as Aave collateral?

The BTC would remain locked on Bitcoin, while an Ethereum token records the collateral for Aave’s contracts. Babylon’s proposal says that token is transfer restricted and serves as an internal accounting unit, rather than a tradeable wrapped-BTC asset. A depositor’s BTCVault is a single Bitcoin UTXO, so collateral is withdrawn or seized in whole vaults, not fractions.

The second Spoke addresses how liquidations settle across the two networks. According to the proposal, a liquidator could exchange a seized BTCVault for WBTC drawn from an Aave Hub, while an arbitrageur later repays that WBTC debt and redeems the vault on Bitcoin. Babylon says this route is needed because Bitcoin redemption takes multiple days through a claim challenge window.

What still has to happen before borrowing can launch?

The proposal is not approval to launch: it is at the ARFC stage for community feedback and risk analysis. The Cointelegraph report on the proposal also describes the governance path as involving further votes before launch. If the discussion reaches consensus, Babylon’s post says the next steps are a Snapshot vote and then an Aave Improvement Proposal with full risk parameters for an onchain vote.

The proposal also gives Aave DAO the first $500,000 in qualifying annual revenue from the integration; qualifying revenue covers specified protocol fees, not all borrower interest. Aave DAO would set the Spokes’ risk parameters, including supply and borrow caps, while Babylon governance representatives would control Trustless Bitcoin Vault protocol settings and pause functions. Watch for the risk analysis and whether the proposal advances to Snapshot; no vote date is set in the post.

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