Babylon Proposes Native Bitcoin Lending on Aave V4 Without Wrapped Tokens
Bitcoin-focused Babylon Labs has introduced a proposal for the Aave platform to enable users to borrow stablecoins against native Bitcoin collateral without using wrapped tokens or bridges. The mechanism involves locking BTC on its own blockchain while issuing a non-transferable token on Ethereum as collateral representation. If approved, Aave DAO would receive the first $500,000 in qualifying revenue from this integration.
Babylon's Proposal for Aave
Babylon Labs introduced a novel credit facility approach on Aave, enabling users to lock native Bitcoin in vaults directly on the Bitcoin blockchain and borrow stablecoins against it on Aave. A non-transferable token will be issued on Ethereum as a representation of the collateral, maintaining Bitcoin on its native chain without the need for wrapped tokens or bridges.
The initiative addresses risks tied to custodian-held BTC when using tokens like Wrapped Bitcoin (WBTC) or Coinbase Wrapped Bitcoin (cbBTC), currently supported by Aave. This proposal offers a less risky alternative to expand Bitcoin-backed lending on the platform.
Current Status and Next Steps
Initially submitted on May 25, the proposal passed a preliminary community vote on June 10. It is now at the Aave Request for Comment (ARFC) stage, collecting community feedback and undergoing risk analysis.
If community consensus is reached, it will proceed to a three-day offchain voting on Snapshot requiring at least 320,000 AAVE-equivalent votes in favor to move to the formal onchain vote per Aave's governance rules. The onchain vote must then satisfy quorum and approval thresholds.
If approved, Aave DAO will receive the first $500,000 of qualifying annual revenue generated from Babylon’s native Bitcoin integration.
Why it matters
This proposal marks a significant development in decentralized lending by enabling the use of native Bitcoin as collateral without relying on wrapped tokens or bridging solutions, which introduce counterparty risks. Successful implementation will enhance user opportunities on Aave, improve the security of Bitcoin-backed lending, and provide additional revenue streams for the DAO to further the ecosystem’s growth.
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