Babylon Labs has submitted a proposal aimed at allowing users to borrow stablecoins on Aave by using native Bitcoin (BTC) as collateral. The initiative seeks to integrate the largest cryptocurrency directly into Aave’s lending platform without relying on wrapped or bridged tokens.
How the Proposal Works
With this approach, users would lock their BTC in vaults operating on the Bitcoin blockchain. That Bitcoin remains on its native network and is not transferred or tokenized through bridging. Instead, a non-transferable token issued on Ethereum represents the locked Bitcoin on the Aave protocol, providing verifiable proof of collateralization.
This differs from current methods that use wrapped tokens such as Wrapped Bitcoin (WBTC) or Coinbase Wrapped Bitcoin (cbBTC), which require users to trust custodians holding the original BTC. Babylon’s design aims to reduce counterparty risk associated with custodial services.
Babylon Labs initially submitted this proposal on May 25. A preliminary community vote passed on June 10, giving way to the current stage for broader feedback and risk assessment.
Governance and Revenue Structure
The proposal stipulates that Aave DAO would earn the first $500,000 in qualified annual revenue generated by the BTC integration. This revenue structure was introduced to align incentives between all stakeholders.
Currently, the proposal remains at the Aave Request for Comment (ARFC) phase. During this stage, members of the Aave community can evaluate the technical risks and provide input ahead of further governance actions.
If the community supports the plan, it would move to a three-day offchain Snapshot vote. To advance, the proposal needs at least 320,000 AAVE-equivalent votes in favor, according to rules in Aave’s governance documentation. Upon meeting those requirements, a formal onchain vote would be triggered, subject to quorum and approval thresholds.
Aave already provides lending options for Bitcoin using custodial solutions like WBTC and cbBTC, but these introduce counterparty risks since third-party entities must hold the underlying BTC on behalf of users.
DeFi’s Native Bitcoin Ambitions Expand
The push to allow native Bitcoin as collateral comes as Aave continues to expand into new products and networks. The protocol recently launched its V4 version on Avalanche, aiming to pave the way for tokenized credit markets and further interoperability in decentralized finance.
As DeFi protocols strive to incorporate Bitcoin in more seamless ways, technical factors such as collateral verification, risk management, and the process of monitoring collateralized assets gain increased importance for both users and governance participants.
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