Babylon Labs Asks Aave DAO to Accept Native BTC Collateral

Babylon Labs filed a Temperature Check with Aave DAO on May 25 seeking approval to add native bitcoin as collateral on Aave V4 through a design called Trustless Bitcoin Vaults. The proposal aims to let BTC holders lock coins on Bitcoin and use corresponding vault tokens on Ethereum with no bridges, wrapped tokens or external custodians.

The submission proposes two new Aave V4 Spokes on Ethereum Mainnet. The Babylon Core Lending Spoke would let users deposit native BTC collateral and borrow assets such as stablecoins and wrapped BTC. The BTC Vault Swap Spoke would manage post-liquidation settlement by converting seized vaults into WBTC for permissionless liquidators. If the Temperature Check receives positive community sentiment, the plan would move to an Aave Request for Comment (ARFC) for detailed risk review and then to an on-chain AIP vote for final approval.

The integration uses Taproot scripts on Bitcoin. A depositor locks BTC inside a Taproot unspent transaction output (UTXO) on Bitcoin, which generates a matching vault record on Ethereum. Because Aave V4 accepts only ERC-20 tokens as collateral, adapter contracts would mint a one-to-one, transfer-restricted ERC-20 called vaultBTC to represent each vault. Those vaultBTC tokens would be restricted to transfers among the Aave V4 Hub, the Babylon Core Spoke and the adapter contract, preventing free movement outside the system.

The proposed liquidation flow separates immediate settlement on Ethereum from BTC redemption on Bitcoin. Permissionless liquidators could swap seized vaults for WBTC at a small premium to settle borrower debt on Aave quickly. A set of permissioned arbitrageurs would then purchase escrowed vaults, repay the WBTC obligations and redeem the underlying BTC on Bitcoin according to native-chain timing.

Babylon Labs said the design is intended to increase borrow demand for WBTC on Aave, where roughly $5 billion of WBTC is supplied but underused on the borrow side. Aave DAO would keep control over risk parameters, supply caps, borrow caps and governance oversight for both Spokes. Specific risk settings, oracle configurations and trust assumptions are planned for the ARFC stage.

Babylon Labs cited cryptography from the BaBe paper, co-authored with UC Berkeley, as central to the design. The research reduces the cost of SNARK proof verification on Bitcoin by about 1,000 times versus earlier methods, which the company says makes an economically feasible fraud-proof challenge window more practical. The paper is scheduled for presentation at CCS 2026.

Security work for the integration is under way. Babylon Labs reported audits and reviews with Coinspect, Sherlock, Zellic, ABDK and ZK Security, and formal verification by Runtime Verification. The company stated it received no third-party payment to publish the proposal.

Babylon Labs was co-founded in 2022 with Stanford professor David Tse and Dr. Fisher Yu. The firm has raised over $100 million from investors including Andreessen Horowitz, Paradigm and Polychain. Since launching a BTC staking protocol in August 2024, Babylon Labs says it has activated more than 100,000 BTC cumulatively and currently holds about 51,000 BTC-roughly $4 billion-in active stakes.

Early governance responses were broadly positive. Aave founder Stani Kulechov endorsed the Temperature Check. An Aave Labs technical service provider noted the integration aligns with Aave V4’s Hub-and-Spoke architecture and could raise borrow-side demand for WBTC. Contributor Nicopei highlighted that keeping BTC native while offering predictable borrowing costs addresses conditions cited by some institutional borrowers who now use off-chain solutions.