Babylon Labs Develops Native Bitcoin Collateral Option

Babylon Labs has moved its initiative to integrate native Bitcoin as collateral for Aave V4 one step closer to potential adoption. The plan was published on Oct. 14 for community comment and risk review, following an earlier temperature check that passed in June.

Under the structure, users would deposit Bitcoin into vaults maintained on the Bitcoin network itself. Each position would then be represented by a non-transferable token on Ethereum, enabling borrowing of stablecoins through Aave without moving or wrapping the underlying BTC. This keeps the actual collateral on its home chain.

The approach contrasts with Aave’s existing support for Wrapped Bitcoin and Coinbase Wrapped Bitcoin, both of which rely on third-party custodians to hold the underlying asset. Babylon’s design aims to reduce counterparty risk tied to those custodians by maintaining direct control on the Bitcoin side.

Governance and Implementation Timeline

Aave has opened the request for comment period, inviting users to examine the technical details, security model, and risk assumptions. Feedback and analysis are required before any further advancement.

If the community reaches consensus, the proposal could advance to a three-day off-chain Snapshot vote. At least 320,000 AAVE-equivalent votes in favor would be needed to proceed. A subsequent formal on-chain vote would then need to meet quorum and approval thresholds.

The process traces back to May 25, when Babylon Labs first submitted the temperature check. That preliminary vote passed on June 10, paving the way for the current ARFC submission.

Revenue Allocation and Economic Incentives

The proposal includes an allocation that would direct the first $500,000 in qualifying protocol-level fee revenue generated by the integration each year to the Aave DAO treasury. This covers qualifying fees rather than all borrower interest payments.

The arrangement provides a mechanism for the Aave DAO to benefit from the new collateral option while aligning incentives between the Babylon integration and the lending protocol’s governance body.

Technical Details of the Native Collateral System

Users lock Bitcoin in Bitcoin-native vaults. The non-transferable Ethereum token then represents those locked positions within Aave’s lending logic. Borrowing capacity is calculated based on the Ethereum representation, but the underlying Bitcoin never leaves its network.

This architecture separates the roles of the two chains: Bitcoin handles collateral storage and security, while Ethereum manages the transferable lending position. The model is designed to avoid the custodial dependencies present in wrapped Bitcoin alternatives.

Security analysis and audits would still be required as part of any launch preparation. The proposal emphasizes trustless vault operations on the Bitcoin side to support the overall collateralization.

Earlier plans for this native Bitcoin lending approach were outlined by Babylon Labs and HashKey Cloud in prior announcements. The current ARFC submission builds on that foundation.