Babylon Labs Tables Native Bitcoin (BTC) Collateral Proposal for Aave V4

Trustless Bitcoin Vaults Enter Aave Governance

Babylon Labs has asked Aave governance to accept native Bitcoin (BTC) as loan collateral on the protocol's V4 architecture, posting a proposal built on its Trustless Bitcoin Vaults (TBV) design in the governance forum on October 14. The request goes to Aave V4 specifically: it asks the decentralized lending market to add a Babylon Spoke and a BTC Vault Swap Spoke, with borrowing stablecoins against Bitcoin as the first listed use case. Aave V4 organizes liquidity through Spokes, modules that route supplied assets and borrows under their own parameters. Under the design, users would lock BTC in Taproot-based UTXOs on the Bitcoin network, an output format the chain gained through a Segregated Witness upgrade. An Aave adapter would then create a collateral record matching each locked output one for one, so recognized collateral equals the locked amount. The proposal describes that record as an internal accounting unit Aave recognizes as collateral, not a wrapped token that users hold or trade. The name reflects the pitch: collateral held trustlessly on the originating chain, recognized by Aave without a bridge operator in between. This is the structural break from existing arrangements, which place the underlying asset in the hands of a Wrapped Bitcoin (WBTC) issuer or a centralized custodian. Lending and liquidation would still involve Aave smart contracts, oracles and Babylon's vault procedures. For valuation the proposal specifies Chainlink's BTC/USD oracle, meaning Bitcoin (BTC) price data would feed the health metrics that trigger liquidations, while a WBTC/USD oracle handles settlement payouts. The filing also positions the vault structure as a building block for Bitcoin DeFi, letting holders borrow against coins that never leave the chain's own settlement layer. No collateral limits, liquidation thresholds or loan-to-value figures appear in the post; the proposal leaves those to Aave's risk analysis providers at a later stage.

Whole-Vault Liquidation and Split Emergency Powers

Liquidation is the operational puzzle the proposal spends most of its length on. Each BTCVault consists of a single Bitcoin (BTC) UTXO, so it cannot be split for a partial liquidation. The text states that when collateral health drops below the liquidation threshold, the liquidator takes delivery of the entire vault, and if the vault is worth more than the debt, the surplus is paid out in WBTC. Permissionless liquidators would not have to wait for Bitcoin settlement themselves: the BTC Vault Swap Spoke would purchase liquidated vaults with WBTC and hold them in escrow, after which a mediator buys the vault and repays it on the Bitcoin network. Final settlement can take several days, the proposal acknowledges, because the escrowed WBTC has to be converted back into actual Bitcoin by the mediator. Authority over the structure is divided. The Aave DAO would set the collateral and loan assets and the risk parameters, and could freeze or pause the Aave-side Spokes. Configuration of the TBV contract, its operator set and its emergency pause and freeze powers sit with Babylon's governance delegate, and the text states explicitly that pausing the TBV contract can halt the withdrawal path as well. Forum participant Foreshock flagged that off-DAO emergency stop authority during the risk discussion, saying it must be verified as part of the analysis. Aave founder Stani Kulechov voiced support, and early responses paired praise for a collateral design that skips wrapping and bridging with calls to review the powers; those are individual views, not a DAO-wide endorsement or a recorded vote. On security, the proposal cites audits from multiple firms plus formal smart contract verification by Runtime Verification. Re-audits covering changes finalized before mainnet are underway, with reports to follow once complete, so the audit record alone does not clear the current deployment version of all risk.

Our reading: the post is a scoping document, not a product launch, and the vote record does not exist yet. Under Aave's process, the proposal must clear community feedback and risk analysis before a Snapshot vote; a positive Snapshot result would then be followed by an on-chain AIP vote carrying the complete risk parameters. Collateral caps and liquidation conditions would come from Aave's risk analysis providers, and the emergency powers Foreshock identified stay outside the DAO until reviewed. If approved, the design would open a lending route for Bitcoin (BTC) holders with no bridge operator or issuer behind the collateral. Until the Snapshot and on-chain votes record approval, native Bitcoin collateral on Aave V4 stands exactly as filed.