Babylon Labs introduces proposal to enable real Bitcoin as collateral on Aave V4

• Babylon Labs has proposed integrating Trustless Bitcoin Vaults (TBV) into Aave V4.
• The proposal introduces a framework that enables native BTC to be used as collateral on Aave without bridges or wrapped tokens.
• Babylon Labs introduces two Aave V4 Spokes to support BTC-backed lending and manage post-liquidation settlement processes.

Babylon Labs has introduced a Temperature Check proposal on the Aave governance forum, seeking to integrate its Trustless Bitcoin Vaults (TBV) protocol within Aave V4, according to an announcement on Monday. The proposal outlines a framework for enabling the usage of native Bitcoin (BTC) as collateral on the lending protocol without relying on bridges or wrapped assets.

Babylon proposes to enable native Bitcoin collateral on Aave

The proposal requests approval to deploy two new Aave V4 Spokes. These include the Babylon Core Lending Spoke and the BTC Vault Swap Spoke, designed to facilitate onboarding of native BTC collateral via TBV. Under this system, users will lock BTC in a Taproot-based UTXO on the Bitcoin network, while collateral representation and lending functions are handled on Ethereum.

TBV introduces a mechanism that mirrors locked BTC on Ethereum as a transfer-restricted ERC-20 token, vaultBTC. This token can be used as collateral within Aave V4’s lending markets. 

The Core Lending Spoke enables users to borrow approved assets against their BTC-backed positions, while the Swap Spoke manages post-liquidation settlement, denominated in wrapped Bitcoin (WBTC).

Babylon Labs’ proposal emphasizes that TBV maintains Bitcoin’s self-custodial properties. BTC remains locked on the Bitcoin network under Taproot scripts, with redemption governed by cryptographic conditions. 

Withdrawals will require a valid zero-knowledge (ZK) proof verifying that predefined conditions, such as loan repayment, have been met on the host chain. Invalid claims can be challenged during a designated fraud-proof window, preventing unauthorized access.

Babylon Labs, a decentralized protocol focused on enabling native Bitcoin staking and lending, is backed by $100 million+ investments from firms such as a16z, Paradigm and Polychain, among others. 

The platform has processed over 100,000 BTC in cumulative deposits, with approximately 51,000 BTC currently staked.

Aave founder Stani Kulechov commented on the proposal, describing it as the first novel Spoke implementation put forward for Aave V4.

“The first novel Spoke implementation proposal for Aave V4 by the Babylon team introduces trustless BTC collateral on Aave V4 without Bitcoin ever leaving the Bitcoin network,” he wrote on X.

If approved, the proposal will progress to the Aave Request for Comment (ARFC) stage, where risk parameters, oracle design, and audit outcomes will be evaluated, before potentially advancing to a formal Aave Improvement Proposal (AIP).

Security reviews are already underway, with audits being conducted by firms including Coinspect, Sherlock, Zellic, ABDK, and ZK Security.

The move comes amid recent backlash faced by the Aave team, including the KelpDAO hack that affected the Aave ecosystem and the broader DeFi market.

Aave is trading at $86 following the announcement, up 1% over the past 24 hours at publication time.