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Babylon Seeks Aave Approval for Bitcoin-Backed Loans

Babylon has proposed letting Aave V4 users borrow stablecoins against native Bitcoin held in vaults, pending review and approval by Aave DAO.

The Onchain Brief Editors2 min read
Babylon Seeks Aave Approval for Bitcoin-Backed Loans

Babylon Labs has proposed letting people borrow stablecoins on Aave V4 using native Bitcoin as collateral, while the BTC remains locked on the Bitcoin network. The proposal was posted to the Aave governance forum on Oct. 14. It is still under review and is not a live lending service.

Babylon’s plan would add two Aave V4 components, called Spokes: one for borrowing against Bitcoin and another to help settle liquidations. A Spoke is a dedicated market connected to Aave’s lending system. Aave risk providers would set the risk limits, according to the proposal.

How would Bitcoin back an Aave loan?

Borrowers would lock BTC in a Taproot output, a type of Bitcoin transaction, to create a Trustless Bitcoin Vault. The vault’s rules govern when the BTC can be redeemed. Babylon says the BTC would not be wrapped, bridged to another chain or held by a custodian.

Aave V4 accepts ERC-20 tokens as collateral, so the proposal uses a transfer-restricted token inside the integration to account for the locked Bitcoin. It cannot be traded or transferred between users, according to the proposal. The first proposed loan use is borrowing stablecoins against BTC.

The design also needs a path for liquidations, when collateral is sold to cover a risky loan. The proposal says a liquidator could receive wrapped BTC, with WBTC planned for launch, while an approved arbitrageur later redeems the vault on Bitcoin. The Bitcoin redemption process can take several days because it includes a challenge window.

What still needs Aave’s approval?

The proposal was authored by Babylon Labs and asks the community to consider the integration. It says the next steps are community feedback and risk analysis, followed by a Snapshot vote if there is consensus. A final on-chain Aave governance approval would still be needed after that.

Babylon’s earlier partnership announcement described the project as work with Aave Labs, but the current forum proposal does not set a launch date. Risk settings, including borrowing limits and liquidation terms, are also not yet specified. Until governance approves and the system is deployed, users cannot borrow through this plan.

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