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Babylon Labs has submitted a proposal to Aave. The idea: use native Bitcoin as direct collateral on the protocol, bypassing wrapped tokens or bridges.
No wBTC. No intermediaries. Just raw BTC.
This represents a significant shift in DeFi logic. Currently, a Bitcoin holder wanting to borrow on a decentralized platform must first convert their BTC into something else — a wrapped token, a custodial asset, a tokenized version. This process takes time, incurs fees, and, most importantly, adds layers of risk. Each bridge, each wrapper, is an additional attack surface. DeFi’s history is littered with exploits targeting these mechanisms. Babylon Labs aims to bypass all of this by integrating Bitcoin directly into Aave V4.
Babylon Labs Targets Aave V4
The targeted version is Aave V4 — not the still-dominant V3, but the next generation of the protocol. Babylon Labs wants native Bitcoin to be recognized as valid collateral on this specific version. While the proposal doesn’t yet offer detailed technical specifics, the direction is clear: eliminate the need for intermediate tokenization.
And this is where it gets interesting — or complicated, depending on your perspective.
Bitcoin is not designed to interact directly with Ethereum smart contracts. It’s a different network, a different logic. Native integration likely involves significant protocol adjustments to ensure transactions remain secure and verifiable. The proposal does not yet detail how Babylon Labs plans to address these technical issues. It’s quite unclear at this point.
What we do know is that the first step is a community sentiment vote. Aave operates through decentralized governance — AAVE token holders vote on changes. Before moving to technical discussions or tests, it’s essential to gauge community interest. This sentiment vote is essentially an intention survey. It doesn’t finalize anything, but it guides the next steps.
What This Means for Bitcoin Holders
If successful, the implications for BTC holders would be tangible. Currently, borrowing USDC or ETH by using Bitcoin as collateral requires prior conversion. This means fees, counterparty risk on the wrapper, and often a temporary loss of control over one’s assets. Babylon Labs wants Bitcoiners to access DeFi credit markets while keeping their BTC in its native form.
This is a strong argument to attract a user base that has so far stayed away from Ethereum DeFi precisely because they refuse to alter their bitcoins or bridge them.
And the potential market is huge. Bitcoin still represents the largest market capitalization in the crypto sector. Only a fraction of this liquidity is currently mobilized in DeFi. If Aave manages to capture even a small portion of BTC holders who want to borrow without relinquishing their assets, it changes the scale of the protocol.
But the road is long. First, the sentiment vote. Then technical discussions. Then tests. Then potential deployment — the word “potential” is crucial here. Nothing is guaranteed.
The Aave community has previously rejected or delayed similar proposals when technical risks were not adequately addressed. And on a sensitive issue like cross-chain asset integration such as Bitcoin, skeptics will likely be numerous.
Babylon Labs has not provided a precise timeline. No official comment from Aave at this stage either. The proposal exists, it’s in the governance circuit, and the sentiment vote will give an initial indication of the direction.
For now, Bitcoin remains at the door of Ethereum DeFi. Babylon Labs wants to open it — without intermediaries.
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Frequently Asked Questions
What is Babylon Labs proposing to Aave?
Babylon Labs proposes to integrate native Bitcoin as collateral directly on Aave V4, bypassing wrappers, bridges, or intermediate tokenization solutions.
What is the current status of the proposal?
The proposal is in its initial phase: a community sentiment vote among Aave users must take place before any technical discussion or potential deployment.
Why avoid wrappers like wBTC?
Wrappers and bridges add layers of technical risk — each intermediary represents a potential attack surface. Babylon Labs’ native approach aims to reduce these vulnerabilities for Bitcoin holders.
