Babylon wants Aave users to borrow against Bitcoin still locked on Bitcoin
Babylon Labs has proposed an Aave V4 integration that would let users lock BTC on Bitcoin and borrow through Aave without handing their coins to a conventional custodian. The collateral would stay on Bitcoin, but the design still depends on Ethereum contracts, cryptographic proofs and a WBTC-based liquidation route. It has not been approved to launch.
- Babylon submitted the proposal on October 14, 2026; it remains in governance review.
- A restricted Ethereum token would represent BTC locked in Bitcoin vaults.
- A separate Aave component is designed to handle liquidations using WBTC.
- Risk settings, further security work and governance approval are still outstanding.
The October proposal, an Aave Request for Comment (ARFC), follows a preliminary Temperature Check submitted on May 25, 2026. Biggo reported that the earlier proposal passed a community vote in June. The ARFC provides more detail on the Aave V4 design, but a proposal under discussion is not approval to launch.
BTC stays on Bitcoin, with an accounting link to Aave
Under the plan, a borrower would lock BTC in a vault on the Bitcoin blockchain, then borrow supported assets through Aave. Stablecoins would be the initial use case. Taproot conditions would limit how the deposited coins can be spent.
Aave’s proposed Ethereum-side integration needs a way to account for the collateral. Babylon proposes a restricted ERC-20 token to represent the locked BTC on a one-to-one basis. The token would not be a freely transferable or tradable Bitcoin wrapper. The proposal says it would be limited to designated contracts. The earlier Temperature Check says the token would be minted when a BTC vault is added to a position and burned when the BTC is withdrawn.
The proposal would still use a token representation inside Aave, but aims to stop that token from circulating as a general-purpose BTC asset. The Bitcoin vault and Ethereum-side accounting system would still need to stay in sync.
Babylon says its approach operates without transferring custody to any trusted third party. In other words, the design aims to avoid handing BTC to a conventional custodian or signer group with discretionary control over the coins. That does not mean the system has no dependencies. Users still rely on the vault rules, software, proof generation and verification, and the processes for handling an invalid claim or operational failure.
Borrowing and liquidation have separate Aave components
The proposal introduces two Aave V4 “Spokes, ” components designed to handle specific market functions. The Babylon Spoke would manage borrowing against native BTC collateral. The BTC Vault Swap Spoke would handle liquidations, which close some or all of a borrower’s position when the collateral no longer adequately covers the loan.
Liquidation is complicated by the split between chains: Aave manages the loan, while the BTC sits in a Bitcoin vault. Babylon’s proposal describes a route in which WBTC borrowed from Aave’s Hub backs escrowed BTC vault positions. Liquidators would receive wrapped BTC, while arbitrageurs acquire the escrowed vault and complete the Bitcoin-side redemption. WBTC is the initial wrapped asset proposed for this mechanism.
That gives WBTC a role in the liquidation process, even though the borrower’s collateral record is not meant to be a freely circulating wrapped-BTC token. The proposal’s success would depend in part on the swap and settlement process working as intended, including access to WBTC and completion of the Bitcoin-side steps.
Biggo reported that vault redemption may take several days because of a challenge period. That delay matters. Liquidation has to work when markets are under pressure, not just in ordinary conditions. The proposal describes a way to bridge the timing gap, but the materials provided do not show how the mechanism performs in stressed conditions or explain every consequence of a delayed or failed settlement.
Risk settings and votes are still ahead
Aave’s DAO would set borrowing limits, collateral requirements, interest-rate settings and liquidation rules. Risk service providers are expected to recommend parameters, but the proposal does not include a final set. Those decisions will shape how much risk lenders take and whether the product works for borrowers.
Babylon lists community feedback and risk analysis, a possible Snapshot vote, and an Aave Improvement Proposal with full risk settings for a final onchain vote as the next steps. Babylon had not announced dates for the votes. Biggo reported that the relevant Snapshot process requires at least 320, 000 AAVE-equivalent votes in support. That figure is separate from the participation or approval requirement for final onchain governance.
Security reviews are part of the process, not a safety guarantee
Biggo reported that Babylon’s proposal describes reviews across five areas: Bitcoin vaults, proof generation, smart contracts, web services and the cryptographic system used for vault settlement. The firms named are Coinspect, Sherlock, Zellic, ABDK, ZK Security and Runtime Verification. According to that reporting, each component received at least two independent reviews, and Runtime Verification formally checked the smart contracts.
Formal verification checks whether software meets specified properties under stated assumptions. It can catch important classes of errors, but it cannot prove that every component or assumption in a cross-chain system is safe. Babylon also said it was reviewing finalized changes with Coinspect, ABDK and Zellic, with follow-up reports to be published when the work is complete.
The security case is still a work in progress. The vaults, proof system, contracts and settlement process all need to work together, and the final review status should be considered alongside the risk of delayed or unsuccessful Bitcoin-side settlement.
Babylon’s staking figures are not Aave deposits
In the October proposal, Babylon reported that its Bitcoin staking protocol had activated more than 100, 000 BTC cumulatively since August 2024. It listed approximately 40, 772 BTC as currently staked when the proposal was prepared, with an estimated value of $3.37 billion.
The cumulative figure covers BTC activated through the staking protocol over time. The 40, 772 BTC figure is a snapshot of the amount staked at that point. Neither figure represents deposits into the proposed Aave integration. Staking and lending are separate activities with different mechanisms and risks. These numbers do not show how much demand the Aave product will attract or how it will perform during liquidations.
Revenue terms leave a gap to clarify
The proposal’s reported revenue-sharing terms would give Aave DAO the first $500, 000 in annual qualifying revenue. For qualifying revenue between $500, 000 and $2 million, the proposed allocation is 78% to Aave DAO, 18% to Babylon and 4% to token purchases. Above $6 million, the proposed allocation is 61.5% to Aave DAO, 31.5% to Babylon and 7% to token purchases.
Biggo reported that 85% of the token-purchase allocation would go to AAVE and 15% to BABY, with the purchased tokens divided equally between Aave DAO and Babylon Foundation. Qualifying revenue includes specified protocol fees, such as Aave’s liquidity fee on borrowing interest and fees collected through liquidations. It does not include every dollar of borrower interest.
The reported terms do not specify the allocation for the $2 million-to-$6 million range. They also do not make clear whether the percentages apply only to revenue within each band or to the full total after a threshold is crossed. That needs clarification before the schedule can be considered complete. These are proposed terms, not a revenue forecast or guarantee.
Key questions about Babylon’s Aave proposal
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Can users borrow against BTC without using wrapped BTC as their collateral record?
That is the proposal’s aim: BTC would stay locked on Bitcoin, while a restricted accounting token represents it inside the Aave integration. WBTC is still proposed for the liquidation process.
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Is the integration approved or live?
No. It remains under governance review, with final risk settings, further security work and additional approval steps still to come.
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Does avoiding a conventional custodian eliminate risk?
No. It changes the risk profile but does not remove risk. The design still depends on software, cryptographic proofs, cross-chain coordination and operational safeguards.
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How would liquidation work while BTC is locked on Bitcoin?
The proposed BTC Vault Swap Spoke would let liquidators receive WBTC while arbitrageurs acquire escrowed vaults and complete Bitcoin-side redemption. Its performance under stressed conditions has yet to be demonstrated.
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When will Aave voters decide?
Babylon had not announced vote dates. A possible Snapshot vote and a later onchain vote are among the steps still ahead.
Babylon is trying to meet a real demand: borrowing against Bitcoin without selling it or handing it to a conventional custodian. Aave voters will have to decide whether the vault design, proof and settlement mechanisms, security work and final risk parameters offer a sound way to do that.
