Babylon Labs has presented a new Aave V4 integration that will allow users to borrow against native Bitcoin collateral without relying on packaged BTC, bridges, or custodians.
The proposal, submitted as a temperature check on the Aave governance forum, seeks community approval for two custom Aave V4 spokes that could onboard Bitcoin through Babylon’s Trustless Bitcoin Vaults. [TBV] system.
Under this model, users lock BTC directly on the Bitcoin network via Taproot-based vault scripts, while borrowing assets on Ethereum via the Aave V4 infrastructure. Babylon said the system avoids traditionally packaged Bitcoin designs by keeping the underlying BTC on Bitcoin itself.
Aave founder Stani Kulechov publicly supported the proposal for X, describing it as the “first new Spoke implementation proposal for Aave V4.”
He also noted that Babylon already has more than $4 billion in BTC that could ultimately serve as collateral within the Aave ecosystem.
The proposal aims to reduce the dependence of custody systems on BTC
Babylon’s proposal repeatedly emphasizes that integration would function without:
- bridges,
- wrapped BTC issuers,
- custodians,
- or multisig signer groups.
Instead, the system relies on Taproot scripts, challenge windows, and zero-knowledge proofs to validate collateral redemption conditions across chains.
The proposal introduces a non-transferable accounting asset, vaultBTC, which represents BTC locked in Babylon vaults as collateral in Aave V4.
Babylon said vaultBTC would not function as a traditionally packaged Bitcoin token and would only be able to interact with approved Aave contracts.
Aave V4 architecture will be an important testing ground
The proposal also highlights how Aave V4’s Hub-and-Spoke architecture could support isolated custom lending systems without impacting the broader protocol.
In addition to the lending spoke, Babylon proposed a separate BTC Vault Swap Spoke, designed to handle liquidations and slow down Bitcoin settlement flows.
The broader goal appears to be creating a trust-minimized path for Bitcoin liquidity to enter Ethereum-based DeFi markets without relying on centralized custody infrastructure.
The proposal is still in the board discussion stage and will still require additional reviews, audits, risk assessments and approval of on-chain votes before implementation.
Final summary
- Babylon proposed an Aave V4 integration that allows users to borrow against native Bitcoin collateral without packaged BTC.
- Aave founder Stani Kulechov publicly supported the proposal, which could ultimately bring billions in BTC liquidity to the DeFi markets.