Babylon moves Aave V4 plan for loans against native, unwrapped bitcoin

Babylon Labs has pushed its plan to let Aave users borrow stablecoins against native bitcoin into the next stage of Aave governance. The proposal, filed on Wednesday, would keep the BTC on the Bitcoin network instead of bridging or wrapping it, Cointelegraph reports.

How it would work

• A borrower locks BTC in a vault on the Bitcoin blockchain.
• A non-transferable token on Ethereum represents that locked BTC and is used as collateral inside Aave V4.
• The borrower then draws stablecoins against it, as with any other Aave collateral.

Because the representative token cannot be moved or traded, it works only as a claim on the vault for lending purposes, not as a new form of “bitcoin on Ethereum”.

Why not just use wrapped bitcoin?

Aave already accepts tokenized bitcoin such as Wrapped Bitcoin (WBTC) and Coinbase Wrapped Bitcoin (cbBTC). Those tokens depend on a custodian holding the real coins, which adds counterparty risk: if the custodian fails or misbehaves, the token’s backing is in question. Babylon’s design tries to remove that middle layer by leaving the coins where they are.

The proposal also includes a revenue term: Aave DAO would receive the first $500,000 of qualifying annual revenue generated by the integration.

The governance path

This is not the first step. Babylon made an initial submission on 25 May, and a preliminary community vote passed on 10 June, according to Babylon Labs.

As of Thursday the plan sits at the Aave Request for Comment (ARFC) stage, where the community and risk teams review it. Under Aave’s rules, it then needs:

1. A three-day Snapshot vote with at least 320,000 AAVE-equivalent votes in favour.
2. A formal onchain vote that meets quorum and approval thresholds.

Security reviews are also still pending, so there is no launch date.

Why it matters

Bitcoin is the largest crypto asset, yet most of it sits idle outside DeFi. A design that lets holders borrow without handing coins to a custodian could make BTC more usable in lending markets — provided the vault mechanics hold up under audit. For background on lending protocols, see what is DeFi.