Babylon Labs has submitted a temperature check proposal to the Aave governance forum, planning to bring native Bitcoin-collateralized lending to Aave V4. The proposal is designed to allow users to lock BTC directly on the Bitcoin network and borrow assets on the Ethereum side via Aave V4, without relying on BTC wrappers, cross-chain bridges, or custodians.
The plan revolves around two sets of Spoke.
The proposal seeks community approval for two customized Aave V4 Spoke systems and access to Bitcoin through Babylon's Trustless Bitcoin Vaults (TBV) system. Babylon states that the underlying BTC will remain on the Bitcoin network, and users will lock up their BTC using a Taproot-based vault script.
Aave founder Stani Kulechov has publicly endorsed the proposal on the X platform, calling it the first new Spoke implementation proposal for Aave V4. He also mentioned that Babylon currently has over $4 billion worth of BTC staked, and these assets may enter the Aave ecosystem in the future as a source of collateral.
No encapsulated BTC and custody structure used
Babylon repeatedly emphasizes in its proposal that this integration solution does not rely on cross-chain bridges, encapsulated BTC issuers, custodians, or multi-signature groups. Instead, the system will use Taproot scripts, challenge windows, and zero-knowledge proofs to verify the collateral redemption process under cross-chain conditions.
The plan also introduces a non-transferable ledger asset, vaultBTC, to represent BTC collateral positions locked in Babylon's vaults. Babylon states that vaultBTC is not a traditional encapsulated Bitcoin token and can only interact with approved Aave contracts.
Aave V4 is used for isolated lending.
The proposal argues that Aave V4's Hub-and-Spoke architecture is suitable for hosting such customized, isolated lending systems, while minimizing impact on other parts of the main protocol. In addition to the lending Spoke, Babylon also proposes a separate BTC Vault Swap Spoke to handle liquidation processes and address Bitcoin's delayed settlement issues.
From a strategic perspective, this design aims to bring Bitcoin liquidity into the Ethereum DeFi market while minimizing reliance on trust, and simultaneously reducing dependence on centralized custody infrastructure. The proposal is currently in the governance discussion phase and will require further review, auditing, risk assessment, and on-chain voting before formal deployment.
