Babylon proposes two Aave V4 spokes for native Bitcoin lending
Babylon has asked Aave’s DAO to consider two V4 spokes for native-Bitcoin collateral, with stablecoin borrowing proposed and governance approval still ahead.
The Aeterna Sol Editors
2 new Aave V4 spokes are at the center of a Babylon Labs proposal to let users borrow stablecoins against native Bitcoin. The plan would add Bitcoin collateral to Aave without wrapping the BTC or handing it to a custodian, but it still needs governance approval.
Babylon published the [ARFC proposal on Aave’s governance forum](https://governance.aave.com/t/arfc-onboard-native-btc-as-collateral-to-aave-v4-via-babylon-trustless-bitcoin-vaults/25845) on October 14. An ARFC is a governance discussion proposal; Babylon says the next steps are community feedback and risk analysis, followed by a Snapshot vote and then an on-chain proposal if those stages are positive.
How would native BTC work as Aave collateral?
Under Babylon’s Trustless Bitcoin Vaults system, a depositor locks BTC in a Taproot output on Bitcoin. The proposal says an Ethereum-side record tracks the collateral, while an adapter creates a transfer-restricted ERC-20 accounting token for Aave V4.
That token cannot be transferred or traded outside the integration. Babylon says it represents the locked BTC for accounting and does not function as a wrapped asset. The BTC itself remains in a Bitcoin vault, and redemption follows pre-authorized rules tied to events on the host chain.
The proposed Babylon Spoke would let users borrow assets from an Aave V4 Hub, with native BTC as its only collateral. A second component, the BTC Vault Swap Spoke, is designed to help liquidators settle positions even though BTC redemption on Bitcoin can take several days.
Why does the proposal need a second spoke?
In a permissionless liquidation, a liquidator could receive a BTC vault but may not have the rights to redeem it directly. The swap spoke would exchange the seized vault for wrapped BTC drawn from an Aave Hub, letting the liquidator settle immediately while designated arbitrageurs later repay that debt and redeem the BTC.
At launch, the proposal names WBTC as the wrapped asset used in that process, while allowing another wrapped BTC asset to be used. Babylon says the mechanism would create borrow demand for that asset on Aave. Aave’s DAO would control the listed assets and key risk settings, including supply and borrow caps, liquidation parameters and oracle configuration.
What still has to happen before launch?
The ARFC does not approve a live market. Babylon’s proposal says risk providers still need to supply parameters, and a positive community response would send the proposal to Snapshot. A positive Snapshot result would be followed by an AIP for on-chain governance approval.
Security work also remains. Babylon says audits have covered five components, with at least two independent reviews for each, and formal verification was performed on the smart contracts. It says re-audits of finalized changes are underway before a mainnet deployment.
The proposal also describes a control boundary for users to consider: Aave DAO can freeze or pause listed assets, while Babylon governance representatives control TBV protocol settings and pause functions. Babylon says a TBV pause stops exit paths and is reserved for emergencies; the proposal specifies a public timelock with advance notice for governance actions.
Aave Labs reported in its [July development update](https://governance.aave.com/t/al-development-update-july-2026/25482) that it was working with Babylon on design, integration and audit reviews after an earlier temperature check. Babylon’s October ARFC advances the proposal into a fuller technical and governance discussion, but the lending market will depend on the remaining reviews and votes.