Summary
Aave DAO has approved a proposal to explore Babylon’s trust-minimized Bitcoin vaults as a route for using native BTC as collateral for stablecoin borrowing on Aave V4. The plan still requires a final on-chain vote and is targeted for a phased mainnet launch around the end of 2026.
A governance approval, not yet a live market
Bitcoin collateral is moving closer to a major test inside Ethereum’s decentralized lending ecosystem. According to reporting by TechFlow, Aave DAO approved an ARFC proposal on Nov. 9 with 100% support to explore bringing native Bitcoin into Aave V4 through Babylon’s so-called trust-minimized Bitcoin vault, or TBV, infrastructure.
The proposal would allow Bitcoin holders to lock BTC and borrow stablecoins such as USDT and USDC without first converting the asset into a conventional wrapped token. The plan is not yet a completed deployment. It still has to proceed to the AIP stage, which represents the final on-chain execution vote. The stated target is a mainnet launch around the end of 2026, initially with limits on both the number of participants and the size of the market.
That distinction matters. Governance approval establishes community support for the framework, but it does not by itself confirm the final code, risk parameters, audit results, or operational readiness of the system. The project’s eventual launch timetable could still depend on those factors and on the outcome of the final execution vote.
How the proposed native-BTC design would work
Most Bitcoin exposure in Ethereum-based DeFi is currently delivered through wrapped assets such as WBTC and cbBTC. These tokens make Bitcoin compatible with Ethereum smart contracts, but they also introduce custody and redemption dependencies. The underlying BTC is generally held through custodial or infrastructure arrangements, creating additional counterparty and operational risks for users and protocols.
Babylon’s proposal takes a different route. As described in the Aave governance materials cited by TechFlow, borrowers would lock BTC in a Taproot vault on the Bitcoin network. The underlying coins would remain associated with an address controlled by the user rather than being transferred to a conventional third-party custodian. On Ethereum, a non-transferable accounting token would be created in an amount corresponding to the locked Bitcoin. That token would serve as the collateral representation recognized by Aave V4.
The architecture is therefore not a simple bridge that moves BTC from Bitcoin to Ethereum. It combines a lockup mechanism on Bitcoin with an accounting representation on Ethereum. The representation allows a lending protocol to calculate collateral and issue stablecoin loans while the underlying asset remains on Bitcoin’s base layer.
This could address one of the long-standing trade-offs in Bitcoin lending: users may gain access to Ethereum liquidity without accepting the exact custody model associated with a conventional wrapped asset. But self-control of the private keys does not eliminate every trust assumption. The system would still depend on the correctness of the Taproot vault logic, the creation and destruction of the accounting token, the synchronization of states across networks, and the ability to handle abnormal conditions.
Risk parameters are positioned near wrapped-Bitcoin markets
The proposal cites an initial collateral factor of 78% for native BTC and a maximum liquidation bonus of 5.55%. Risk parameters attributed to LlamaRisk were described as broadly comparable to the collateral and borrowing conditions for WBTC and cbBTC in Aave V4’s core markets.
A collateral factor is one of the central controls in a lending protocol. It determines how much borrowing capacity can be created against a given asset. A high factor may improve capital efficiency but can leave less room to absorb a sharp price move. A lower factor can provide a larger safety buffer, but may reduce demand and limit the amount of credit that the market can generate.
For the proposed BTC market, the important questions will extend beyond the headline collateral ratio. They will include the reliability of price feeds, the depth of stablecoin liquidity, the availability of liquidators, the speed of confirming the underlying BTC position, and the response of the system during network congestion or a sharp market decline. If the Ethereum-side accounting token and the Bitcoin-side vault fall out of sync, the consequences could affect both lenders and borrowers.
The planned restrictions on early participation and market size suggest a controlled rollout. That approach could allow the governance community and risk providers to observe the system before broader expansion. Institutional users and custody teams evaluating such a structure would likely need to examine the relationship between the Bitcoin lockup and the Ethereum accounting token, the permissions embedded in the vault, the liquidation process, and potential single points of failure.
A tiered revenue-sharing model
The proposal also includes a revenue-sharing framework between Aave and Babylon. According to the cited proposal, the revenue subject to sharing would come from two sources: the liquidity fees Aave receives from borrower interest on this market and fees generated during liquidations.
The first $500,000 in annual revenue would go entirely to Aave DAO. Between $500,000 and $2 million, the proposed allocation would give Aave DAO 78%, Babylon 18%, and 4% to token repurchases. The allocation changes in higher bands. For the portion above $6 million, Aave DAO would receive 61.5%, Babylon 31.5%, and the repurchase allocation would rise to 7%.
The repurchase funds would be used to acquire AAVE and BABY in an 85% to 15% split. The acquired tokens would then be divided equally between Aave DAO and the Babylon Foundation. Alea Research has estimated that, if the market generated $10 million in annual revenue, Aave DAO would receive approximately $6.92 million, Babylon approximately $2.52 million, and the repurchase pool approximately $560,000. About $84,000 of that modeled repurchase amount would be directed toward BABY.
Those figures are scenario-based estimates rather than realized revenue. Actual outcomes would depend on borrowing demand, interest rates, liquidation activity, available liquidity, and whether the market reaches the proposed scale. The structure does, however, give Aave a larger share of early revenue while creating a potential economic channel for Babylon if usage expands.
What the proposal means for BTCFi
The broader significance of the initiative is that it shifts the BTCFi discussion from simply bringing Bitcoin onto another chain to designing a verifiable collateral relationship while reducing conventional wrapping and custody dependencies. Babylon reportedly had approximately 40,481 BTC staked as of the end of the third quarter, with the assets remaining on the Bitcoin network in script-based arrangements. That provides an infrastructure base for further experimentation, but it does not mean that the same amount of Bitcoin will become available as Aave borrowing collateral.
For Aave, native BTC could broaden the range of collateral available to its lending markets and introduce a new source of stablecoin borrowing demand. For Babylon, integration with a large lending protocol would provide a practical test of its vault and cross-chain accounting design. The two systems would nevertheless face the same stress points: price volatility, liquidation timing, oracle reliability, Bitcoin and Ethereum network conditions, and the behavior of the system when one component is unavailable or compromised.
The proposal should therefore be read as a significant governance and infrastructure experiment rather than a fully validated lending product. The next AIP vote, deployment and audit details, initial participation limits, and post-launch liquidation and liquidity data will be more informative than the current governance approval in determining whether native-Bitcoin collateral can operate safely and at scale in an Ethereum lending market.
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