Babylon wants Aave users to borrow against Bitcoin

Oct 15, 2026

Babylon Labs has submitted a new governance proposal on October 14, 2026, to allow Bitcoin holders to borrow stablecoins through Aave V4 without selling their BTC, moving their coins to another blockchain, or handing them to a custodian.

Babylon Labs published the proposal on Aave’s governance forum, advancing an integration first discussed in May. The plan would introduce two dedicated components for Bitcoin-backed borrowing and loan liquidations. The integration still requires community approval, finalized lending risk settings, and further security checks before launch.

Babylon proposes Bitcoin lending without wrapping BTC

The proposal introduces Babylon’s Trustless Bitcoin Vaults technology to Aave V4, the latest version of the decentralized lending protocol.

Under the proposed system, Bitcoin holders would deposit BTC into special vaults operating directly on the Bitcoin blockchain. Their coins would remain locked on Bitcoin while supporting loans issued through Aave.

Borrowers could then access stablecoins against the value of their deposited Bitcoin, subject to the lending rules and collateral requirements eventually approved by Aave governance.

The process differs from Aave’s existing Bitcoin lending arrangements, which support assets such as Wrapped Bitcoin (WBTC) and Coinbase Wrapped Bitcoin (cbBTC).

Aave V4 would introduce two Bitcoin lending components

Babylon proposes creating two new components within Aave V4, known as Spokes.

The first, called the Babylon Spoke, would allow users to borrow supported assets against native Bitcoin collateral. The second, called the BTC Vault Swap Spoke, would handle a more complicated part of Bitcoin lending: liquidations.

A liquidation occurs when a borrower’s collateral value falls too far relative to the outstanding loan. The lending system can close some or all of the position to protect the funds borrowed from the protocol.

Traditional Aave liquidations generally involve assets already available on the same blockchain. Babylon’s proposed arrangement has an additional requirement because the underlying collateral sits on Bitcoin, while borrowing takes place through Aave.

According to the proposal, redeeming a Bitcoin vault can take several days because transactions must pass through a challenge period.

Aave DAO could receive the first $500,000 in annual fees

Babylon’s proposal includes a revenue sharing arrangement between Aave DAO and the Babylon Foundation.

Under the proposed terms, Aave DAO would receive all of the first $500,000 in qualifying annual revenue generated by the integration. The qualifying revenue would come from specified protocol fees, including Aave’s liquidity fee on borrowing interest and fees collected through liquidation activities.

The arrangement would not apply to every dollar of interest paid by borrowers. After the first $500,000, revenue would be distributed according to several annual bands.

Bitcoin lending proposal needs more votes and security reviews

The October 14 submission is an Aave Request for Comment, meaning community members and risk specialists can review and discuss the plan.

Babylon initially introduced the integration through a Temperature Check proposal on May 25.

That preliminary proposal passed a community vote in June, allowing developers to prepare the more detailed October submission.

The current stage does not authorize the integration to launch.

According to Aave’s governance rules, a proposal advancing from the discussion stage can move to an off-chain Snapshot vote before reaching formal onchain governance.

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