Babylon Labs Proposes Native BTC Collateral on Aave

Aave users could soon borrow stablecoins against Bitcoin without relying on custodians or wrapped tokens, under a new governance proposal submitted by Babylon Labs.

The integration would allow holders to lock native BTC in vaults directly on the Bitcoin network. A non-transferable token minted on Ethereum would then represent that collateral inside Aave’s lending pools. The underlying Bitcoin never leaves its native blockchain and is not bridged or wrapped at any point in the process.

This architecture targets a structural vulnerability in decentralized finance. Aave currently accepts Wrapped Bitcoin (WBTC) and Coinbase Wrapped Bitcoin (cbBTC) as loan collateral. Both require third-party custodians — BitGo for WBTC and Coinbase for cbBTC — to hold the actual Bitcoin. If either custodian freezes redemptions, suffers an exploit, or faces regulatory intervention, the wrapped tokens lose their peg and lenders absorb the loss. Eliminating the intermediary removes that counterparty risk entirely.

Babylon Labs, which builds staking infrastructure connecting Bitcoin’s proof-of-work security to other networks, structured the financial terms to incentivize rapid approval. Under the proposal, Aave DAO would capture the first $500,000 in qualifying annual revenue generated by the native BTC borrowing feature.

The submission marks the second phase of a broader push to bring Bitcoin into Aave’s ecosystem. An initial proposal was filed on May 25, followed by a preliminary community vote that passed on June 10. The current version, submitted Wednesday, advances those earlier discussions into formal governance channels.

Securing approval requires navigating Aave’s multi-layered voting system. The proposal is presently in the Request for Comment stage, where delegates and risk teams evaluate technical parameters and market viability. If consensus emerges, it moves to a three-day offchain Snapshot vote requiring at least 320,000 AAVE-equivalent votes in favor. Passing that threshold triggers a binding onchain vote subject to quorum rules.

Integrating native Bitcoin collateral arrives as Aave expands its protocol footprint. The platform recently deployed V4 on Avalanche, establishing infrastructure designed to support tokenized credit markets. Adding self-custodied BTC loans broadens Aave’s appeal to institutional and retail Bitcoin holders who have historically avoided DeFi due to wrapping risks.

Bitcoin’s total supply exceeds 19.7 million coins, yet only a fraction participates in decentralized lending because most owners refuse to hand custody to centralized entities. Protocols attempting to unlock this dormant capital through trust-minimized designs are competing to become the standard bridge between Bitcoin’s base layer and Ethereum-based liquidity.

The ARFC remains open for delegate feedback and risk assessment as of Thursday.