Babylon Labs proposes native Bitcoin-backed lending for Aave V4

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Babylon Labs Bitcoin-backed lending

Highlights

Babylon Labs proposes enabling native Bitcoin as collateral for stablecoin loans on Aave V4 using vaults on the Bitcoin network and non-transferable Ethereum tokens.
The measure entered the Aave Request for Comment stage after passing a preliminary June 10 vote and requires at least 320,000 AAVE-equivalent votes in a Snapshot to advance governance.
The product eliminates custodial risk in Bitcoin-backed DeFi lending and offers Aave DAO a direct incentive on the first $500,000 in annual revenue generated.

Proposal structure and governance path

As reported by Cointelegraph, citing Babylon Labs, the proposal would allow users to post native Bitcoin as collateral for stablecoin loans on Aave through vaults held on the Bitcoin network. A non-transferable token on Ethereum would represent that collateral, while the underlying BTC would remain on its native blockchain instead of being bridged or wrapped.

The Wednesday submission follows an initial proposal filed on May 25 and a preliminary community vote that passed on June 10. As of Thursday, the measure remains in the Aave Request for Comment stage, where it is subject to community feedback and risk analysis.

If the proposal gains community support, it can move to a three-day offchain Snapshot vote. Under Aave governance rules, that step requires at least 320,000 AAVE-equivalent votes in favor before the measure can advance to a formal onchain vote, which must then meet quorum and approval thresholds.

Potential impact on Bitcoin-backed DeFi lending

Aave already offers loans backed by tokenized Bitcoin, including Wrapped Bitcoin and Coinbase Wrapped Bitcoin. Those products depend on custodians holding the underlying Bitcoin, creating counterparty exposure that Babylon's proposal is designed to reduce.

The proposal points to a possible expansion of Bitcoin-based collateral options in decentralized finance if Aave users approve the integration. For Aave DAO, the arrangement also creates a direct revenue incentive through the first $500,000 in qualifying annual revenue generated by the product.

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