Babylon and Aave push for Bitcoin-backed DeFi lending without wrapped BTC

Babylon Labs has proposed a new Aave V4 integration that lets users borrow against native Bitcoin collateral without relying on wrapped 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 would onboard Bitcoin through Babylon’s Trustless Bitcoin Vaults [TBV] system.

Under the model, users lock BTC directly on the Bitcoin network through Taproot-based vault scripts while borrowing assets on Ethereum through Aave V4 infrastructure. Babylon said the system avoids traditional wrapped Bitcoin designs by keeping the underlying BTC on Bitcoin itself.

Aave founder Stani Kulechov publicly endorsed the proposal on X, describing it as the “first novel Spoke implementation proposal for Aave V4.”

He also noted that Babylon already has more than $4bn in BTC staked that could eventually serve as collateral within the Aave ecosystem.

Proposal aims to reduce reliance on custodial BTC systems

Babylon’s proposal repeatedly emphasizes that the integration would operate 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, that represents BTC locked in Babylon vaults as collateral in Aave V4.

Babylon said vaultBTC would not function as a traditional wrapped Bitcoin token and could only interact with approved Aave contracts.

Aave V4 architecture becoming a major testing ground

The proposal also highlights how Aave V4’s Hub-and-Spoke architecture could support isolated custom lending systems without affecting the broader protocol.

Alongside the lending Spoke, Babylon proposed a separate BTC Vault Swap Spoke designed to handle liquidations and delayed Bitcoin settlement flows.

The broader goal appears to be creating a trust-minimized pathway for Bitcoin liquidity to enter Ethereum-based DeFi markets without depending on centralized custody infrastructure.

The proposal remains in the governance discussion phase and still requires additional reviews, audits, risk assessments, and on-chain voting approvals before deployment.

Final Summary

• Babylon proposed an Aave V4 integration that would allow users to borrow against native Bitcoin collateral without wrapped BTC.
• Aave founder Stani Kulechov publicly supported the proposal, which could eventually bring billions in BTC liquidity into DeFi markets.