Aave: onboarding native BTC as V4 collateral via Babylon's Trustless Bitcoin Vaults

Babylon Labs posted the ARFC Onboard Native BTC as Collateral to Aave V4 via Babylon Trustless Bitcoin Vaults on 14 October 2026, following a Temperature Check that passed from 4 to 7 June 2026 with about 299,743 AAVE For and none against. The proposal deploys two new Aave V4 Spokes and lists native BTC, held in a self-custodial Bitcoin vault rather than wrapped or bridged, as the Babylon Spoke's only collateral. As of 28 October 2026 the thread remains in ARFC discussion; it has not been escalated to a Snapshot vote. It matters because it opens a lending market against Bitcoin that never leaves the Bitcoin network, through a governance and liquidation structure that sits partly outside Aave DAO's own control.

What it changes

• Deploys two new Aave V4 Spokes: the Babylon Spoke, which accepts native BTC as its only collateral asset for borrowing stablecoins, and the BTC Vault Swap Spoke, which lets permissionless liquidators settle seized BTC collateral in wrapped BTC while arbitrageurs later redeem the underlying BTC on Bitcoin.
• Native BTC is represented on Ethereum by a transfer-restricted ERC-20, Native BTC Collateral, minted 1:1 in satoshis when a Bitcoin vault is activated and burned on withdrawal or liquidation. It cannot be transferred, traded or held outside the integration's own contracts.
• Risk parameters recommended by LlamaRisk for the Babylon Core Lending Spoke on Ethereum: a 78.00 percent collateral factor and a 5.55 percent maximum liquidation bonus for native BTC, an add cap of 300 BTC, a dynamic liquidation bonus (90.00 percent bonus factor, maximum bonus at a 0.90 health factor), a zero liquidation fee on native BTC, and native BTC kept non-borrowable on every Spoke.
• Proposed bootstrapping credit lines from the Core Hub to the Babylon Core Lending Spoke: 8,000,000 USDT, 8,000,000 USDC, 1,000,000 GHO, 2,000,000 USDG and 2,000,000 RLUSD, plus a WBTC draw cap of 100 from the Core Hub for the BTC Vault Swap Spoke.
• Revenue sharing between Aave DAO and Babylon Foundation: the first $500,000 of qualifying revenue each year goes entirely to Aave DAO, with the DAO's share of revenue above that band falling as low as 61.5 percent above $6 million a year, alongside a token purchase allocation that buys AAVE and BABY on the open market.
• Governance: both new Spokes are controlled by Aave DAO, while the underlying Trustless Bitcoin Vaults contracts are governed by an Interim Governance multisig (4 of 7, with seats held by Babylon, OZ21 (Informal Systems), DSRV, Xangle, Hashkey, B14G and Cradle) and an Emergency Guardian multisig (3 of 5, with seats held by Aave Labs, LlamaRisk, Babylon, BedRock and one seat still to be named). Upgrades and parameter changes on those contracts sit behind a 5-day timelock; a pause does not.

The case for it

Babylon Labs presents the integration as a way to put Bitcoin to work without custodians or wrapped tokens. "The deposited BTC is not wrapped, bridged or held by a custodian." The proposal frames this as more than a one-off listing: "Native BTC as collateral on Aave V4 also serves as a composable primitive for the broader BTC DeFi ecosystem."

The objections

A forum participant posting as Foreshock asked for specifics on who controls the Trustless Bitcoin Vaults contracts before risk parameters are finalized, in a reply: "So two things I would want in the thread before caps and liquidation parameters are proposed: the signer set and threshold behind the TBV governance role, and the timelock delay that applies to a pause." Babylon Labs' lead solution engineer, posting as 0xAleksaOpacic, answered with the multisig composition and confirmed that pausing the Trustless Bitcoin Vaults contracts can happen immediately, without a timelock, because a delayed pause would take effect only after an exploit had already caused damage. The same reply said the Emergency Guardian, on which Aave Labs and LlamaRisk sit, can unpause without Interim Governance, and that Aave DAO will hold its own pauser role on the Aave adapter contracts.

A participant posting as submitblock rejected the claim that the design avoids bridging, in a reply: "You’re describing an ERC20 token, with some centralized entity controlling private keys", which, the reply argues, is what a bridge is. The same participant followed up the next day with a sharper version of the comparison. Babylon Labs did not reply to either post in the thread.

The other early replies were supportive. stani wrote in strong support, as did simo and mrtn.ogrady, and Aave Labs said its review of the integration confirmed that it works as intended with Aave V4, deferring to LlamaRisk on risk parameters.

Where it stands

The proposal is at the ARFC stage, with ten posts between 14 and 23 October 2026 and no Snapshot vote scheduled as of 28 October 2026. LlamaRisk published its risk assessment on 23 October 2026 in a companion thread, supporting the integration while noting that the contracts have not yet been deployed on Ethereum mainnet and recommending an independent Proof of Reserves for the BTC held in Bitcoin vaults. It also notes that early audits found several high- and critical-severity issues, all reported as resolved after further rounds, and that the challenger set is permissioned and small at launch. Aave Labs has said it is running its own security review alongside Babylon's audits and will share reports once they are complete. The proposal's next steps, as stated in the thread, are to gather further community and risk-provider feedback and, if that feedback is positive, escalate to a Snapshot vote before any AIP is submitted.