Babylon Labs has submitted a temperature check proposal to the Aave DAO seeking community input on integrating its Trustless Bitcoin Vaults (TBV) into Aave V4. The move would enable users to borrow against native Bitcoin (BTC) for the first time on the leading DeFi lending protocol, without relying on wrapped assets, bridges, or custodians.
The proposal introduces two new Aave V4 Spokes: the Babylon Core Lending Spoke, which allows borrowing against native BTC collateral, and the BTC Vault Swap Spoke, designed to manage post-liquidation settlement and collateral conversion. Depositors would lock BTC in a Taproot UTXO on the Bitcoin network, with redemption governed by on-chain rules linked to loan repayment. Settlement returns BTC directly to a Bitcoin UTXO controlled by the redeeming party.
The Trustless Bitcoin Vault system uses zero-knowledge proofs to verify events on a host chain like Ethereum, with a fraud-proof window where depositors can act as challengers. This eliminates the need to trust a third party to defend their BTC. On Aave V4, vault records would be represented as vaultBTC, an ERC-20 token mapping one-to-one to the Bitcoin vault.
Aave V4’s Hub-and-Spoke architecture allows these custom spokes to operate in isolation without affecting other assets. Aave DAO would retain full control over caps, parameters, and risk settings, keeping the integration under governance oversight.
The proposal has already garnered support from Aave founder Stani Kulechov, who noted that Babylon currently holds over $4 billion in BTC assets that could be used as collateral. Babylon’s own statistics show over 100,000 BTC cumulatively activated since August 2024, with a peak TVL of 72,000 BTC and current holdings around 51,000 BTC.
If the community feedback is positive, the process will advance through the ARFC stage for risk evaluation, audits, and finalization before an on-chain vote. If approved, this could mark one of the first large-scale implementations of native Bitcoin collateral in DeFi.
