Babylon Labs submitted an Aave Request for Comment on October 14, 2026, outlining a proposal to bring native Bitcoin as collateral to Aave V4 through its Trustless Bitcoin Vaults technology. The stated first use case is stablecoin borrowing against Bitcoin without selling, wrapping, bridging, or handing BTC to a custodian.
Under the proposed architecture, Bitcoin holders would lock BTC in Taproot UTXOs directly on the Bitcoin network. A transfer-restricted ERC-20 accounting token would represent locked BTC on a one-to-one basis within Aave’s Ethereum-based lending system, but it would not be freely tradable. The arrangement is designed to keep the underlying BTC on Bitcoin throughout the loan and avoid the custody models used by existing wrapped assets such as WBTC and cbBTC.
The proposal would add two dedicated Aave V4 components called Spokes. The Babylon Spoke would allow users to borrow supported assets against native Bitcoin collateral. The BTC Vault Swap Spoke would handle liquidations by letting liquidators receive wrapped Bitcoin promptly while Bitcoin-side vault redemptions are completed separately, since vault redemptions can take several days due to challenge periods.
The revenue-sharing framework would allocate the first $500,000 in qualifying annual revenue to Aave DAO. After that, distributions would be tiered: between $500,000 and $2 million, Aave DAO would receive 78%, Babylon 18%, and token purchases 4%; above $6 million, allocations would shift to 61.5% for Aave DAO, 31.5% for Babylon, and 7% for token purchases. Token purchases would be split 85% toward AAVE and 15% toward BABY, with purchased tokens divided equally between Aave DAO and Babylon Foundation.
The proposal remains in the comment stage and requires further governance steps, including a possible Snapshot vote with at least 320,000 AAVE equivalent votes in support and a final on-chain Aave Improvement Proposal. Aave founder Stani Kulechov supported the plan and described native Bitcoin as an important potential source of lending collateral. Babylon reported security reviews by Coinspect, Sherlock, Zellic, ABDK, ZK Security and Runtime Verification, with follow-up audits underway before any potential mainnet deployment.
Babylon also noted that its Bitcoin staking protocol has cumulatively activated more than 100,000 BTC since August 2024, with about 40,772 BTC staked at the time of the proposal, worth roughly $3.37 billion. The new Aave integration would be separate from Babylon’s staking activities.
