Babylon Proposes Native Bitcoin Lending for Aave V4

The proposal introduces two dedicated components, known as Spokes, to manage the integration. The Babylon Spoke handles borrowing against native Bitcoin, while the BTC Vault Swap Spoke facilitates liquidations. Unlike current arrangements that utilize assets like Wrapped Bitcoin (WBTC) or Coinbase Wrapped Bitcoin (cbBTC), this system keeps the underlying collateral on the Bitcoin network using Taproot-based vaults. To bridge the gap with Aave’s Ethereum-based infrastructure, the system would issue a restricted ERC-20 accounting token representing the locked BTC value on a one-to-one basis.

A significant feature of the proposal is a tiered revenue-sharing model. Aave DAO is slated to receive the entirety of the first $500,000 in qualifying annual revenue generated from the integration. Beyond that threshold, earnings would be split between the DAO, Babylon, and a token-purchase fund for AAVE and BABY. Aave founder Stani Kulechov has expressed support for the initiative, noting the potential of native Bitcoin as a lending collateral source.

Despite the progress, the integration remains in the governance phase. Following a successful preliminary vote in June, the current request for comment requires community feedback, risk analysis, and further security checks. Babylon has engaged six security firms, including Sherlock and Runtime Verification, to audit the vault architecture and smart contracts. A final launch depends on subsequent off-chain Snapshot votes and formal on-chain governance approval.