Babylon proposes to integrate native Bitcoin collateral on Aave V4 without the need for cross-chain bridges and custody

Babylon Labs has initiated a temperature check proposal in the Aave community, proposing to integrate native Bitcoin as collateral on Aave V4 through the Babylon Trustless Bitcoin Vaults protocol.

This solution does not require wrapping, cross-chain bridges, or custodians. Users will lock Bitcoin in Taproot UTXOs, and redemptions will be controlled by on-chain rules (such as loan repayments), settling directly to Bitcoin UTXOs. The proposal deploys two Aave V4 Spokes: Babylon Core Lending Spoke (lending) and BTC Vault Swap Spoke (post-liquidation settlement).

Collateral exists in the form of vaultBTC, a transfer-restricted ERC-20 token that can only be transferred between fixed whitelisted addresses. In the liquidation process, liquidators can immediately settle with WBTC, and subsequent Bitcoin redemptions will be completed by arbitrageurs.