Babylon Labs has posted a request for final comment, or ARFC, on Aave’s governance forum asking the DAO to list native bitcoin as collateral on Aave V4. Borrowers would lock BTC in a script on the Bitcoin network through Babylon’s Trustless Bitcoin Vaults and borrow stablecoins on Ethereum against it. The proposal follows a Temp Check from May that passed; Aave V4 has been live on Ethereum since 30 March.
The rundown
- What changed: The ARFC would add two Spokes, V4’s isolated lending markets: a Babylon Spoke where native BTC is the only collateral, and a BTC Vault Swap Spoke that handles liquidations. On Ethereum, each vault is represented 1:1 by a token that cannot be transferred freely. Aave’s risk providers would set the limits.
- Why it matters: Bitcoin used in DeFi has mostly arrived as wrapped tokens such as WBTC, backed by a custodian. Babylon says its BTC is “not wrapped, bridged or held by a custodian”, and is released on Bitcoin only with a valid proof of what happened on Ethereum. The basics of the loan side are in how DeFi lending works.
- By the numbers: The first $500,000 a year of qualifying fees would go entirely to the Aave DAO. Above $6 million, the split would be 61.5% to the DAO, 31.5% to Babylon and 7% to buying AAVE and BABY tokens. Babylon says its staking protocol has activated more than 100,000 BTC since August 2024 and holds about 40,772 BTC now.
- Where it breaks: Liquidation runs through a detour. A liquidator is paid in wrapped BTC borrowed from Aave’s Hub, WBTC at launch, while arbitrageurs buy the seized vaults and redeem the bitcoin on Bitcoin over a challenge window. Each seized vault is carried by WBTC borrowed from the Hub until it is bought, so the design leans on arbitrageurs being willing to do the Bitcoin-side work. Babylon also says a re-audit of its final code is still under way before mainnet.
Next come forum feedback, a Snapshot vote and then an on-chain proposal. Read the ARFC on the Aave forum.
This article is for information only and is not investment advice.