Babylon Wants to Let You Borrow Against Real Bitcoin on Aave, No Wrapping Required

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• Babylon Labs posted a governance proposal on October 14, 2026 to let Aave V4 accept native, unwrapped Bitcoin as collateral, using a mechanism it calls Trustless Bitcoin Vaults
• The design locks BTC in a Bitcoin-native Taproot transaction, with an Ethereum-side adapter representing each vault as a non-transferable token that only Aave’s own contracts can move
• Qualifying revenue from the new system would be split with Aave DAO under a tiered schedule, starting at 100% to the DAO and settling at 61.5% to the DAO once annual revenue passes $6 million

Babylon Labs submitted a governance proposal to the Aave community on October 14, 2026 seeking to onboard native Bitcoin as collateral on Aave V4, using a system the company calls Trustless Bitcoin Vaults. The design’s core promise is that depositors never have to wrap, bridge, or hand their bitcoin to a custodian to use it as collateral on Aave, addressing one of the longest-standing frictions in bringing Bitcoin’s liquidity into Ethereum-based DeFi lending markets.

Under the mechanism, a depositor locks their BTC in a Taproot-based Bitcoin transaction, with a vault provider and a set of vault keepers and universal challengers pre-signing the limited set of Bitcoin transactions that could ever move the locked funds. The depositor activates the vault by revealing a cryptographic secret on Ethereum, and if that activation step fails for any reason, the depositor can reclaim their bitcoin through a timelocked refund mechanism built into the design, giving users a fallback path if something goes wrong before the vault is fully set up.

On the Ethereum side, each active vault is represented by a non-upgradeable, transfer-restricted token with 8 decimal places, minted and burned only by a dedicated adapter contract, with total token supply always matching the amount of bitcoin actually locked across active vaults. The proposal introduces two new Aave V4 Spokes to handle this collateral: a Babylon Spoke where the native BTC collateral can only be liquidated by the Babylon adapter itself, charges no liquidation fee, and has no dust threshold, and a BTC Vault Swap Spoke that settles liquidated vaults by selling them to liquidators for wrapped BTC at the oracle rate minus a discount, drawing that wrapped BTC from an Aave Hub as interest-bearing debt that permissioned arbitrageurs later repay to redeem the underlying bitcoin.

Babylon structured a tiered revenue-sharing arrangement with the Aave DAO tied to how much qualifying revenue, meaning interest paid by Babylon Spoke borrowers and liquidation fees, the system generates annually. On the first $500,000 of annual revenue, the Aave DAO keeps 100%. Beyond that threshold, Babylon’s share rises in stages, reaching 18% between $500,000 and $2 million, 22.5% between $2 million and $4 million, 27% between $4 million and $6 million, and settling at 31.5% above $6 million, with a small slice of revenue above the first tier also allocated toward buying AAVE and BABY tokens on the open market to be split between the Aave DAO and the Babylon Foundation.

The proposal leaves specific risk parameters, such as supply caps, interest rate strategy and oracle configuration, to be set later by Aave’s risk service providers and finalized in a formal Aave Improvement Proposal, with the next steps being community feedback followed by a Snapshot vote. Babylon said security audits of the Trustless Bitcoin Vault system are complete, with a re-audit underway before any mainnet deployment. The proposal, posted on Aave’s official governance forum, is titled “[ARFC] Onboard Native BTC as Collateral to Aave V4 via Babylon Trustless Bitcoin Vaults.”