Bitcoin-focused developer Babylon Labs has officially submitted a formal proposal aimed at letting cryptocurrency users borrow stablecoins on the decentralized lending protocol Aave by using native Bitcoin as collateral. The move represents a significant step forward in bridging the liquidity of the world’s largest cryptocurrency with decentralized finance markets without requiring traditional asset wrapping or cross-chain bridging mechanisms.
Under the architectural design outlined in the proposal, users would securely lock their native Bitcoin within specialized vaults operating directly on the Bitcoin network. Rather than transferring or wrapping the asset to make it compatible with Ethereum-based decentralized applications, the system utilizes a specialized non-transferable token minted on the Ethereum blockchain to represent the underlying collateral. This structural approach allows participants to retain direct exposure to their native Bitcoin holdings while unlocking borrowing power within the Aave ecosystem, effectively mitigating the counterparty and bridge-associated risks that have historically accompanied cross-chain asset transfers.
The newly submitted governance proposal follows a trajectory that began earlier this year. Babylon Labs initially introduced the concept through a preliminary discussion on the Aave governance forums on May 25. This was followed by a preliminary community temperature check vote that successfully passed on June 10, according to public disclosures from Babylon Labs regarding its quarterly founders’ call and development updates for the second quarter of 2026.
As part of the economic incentives outlined in the latest governance filing, the Aave decentralized autonomous organization would stand to benefit directly from the integration. Specifically, the Aave DAO would receive the first $500,000 in qualifying annual revenue generated by the native Bitcoin vault integration. This revenue-sharing mechanism is designed to align the financial interests of both protocols, encouraging the Aave community to adopt the infrastructure while simultaneously bootstrapping value for the DAO’s treasury.
Currently, the Aave lending protocol already supports borrowing activities against tokenized versions of Bitcoin, most notably through assets such as Wrapped Bitcoin (WBTC) and Coinbase Wrapped Bitcoin (cbBTC). However, these existing solutions rely heavily on centralized or federated custodians to hold and secure the actual underlying Bitcoin. This reliance introduces structural counterparty risks, as users must trust the custodian to maintain proper reserves and honor redemption requests. The proposed integration with Babylon Labs seeks to offer a trust-minimized alternative, allowing users to leverage their Bitcoin holdings through cryptographic security guarantees rather than custodial trust.
As of Thursday, the proposal is officially positioned at the Aave Request for Comment stage. During this phase, the initiative is subject to rigorous community feedback, technical scrutiny, and comprehensive risk analysis by risk management entities associated with the Aave ecosystem. This evaluation ensures that any potential vulnerabilities related to the vault architecture, cryptographic assumptions, or economic parameters are thoroughly addressed before moving forward in the governance pipeline.
Should the proposal successfully achieve community consensus during the ARFC phase, it will be eligible to proceed to a subsequent three-day offchain Snapshot vote. According to Aave’s established governance rules and documentation, this offchain voting stage requires a minimum threshold of at least 320,000 AAVE-equivalent votes cast in favor of the measure before it can advance to a formal onchain execution vote.
Following the successful completion of the offchain Snapshot phase, the proposal must transition to a formal onchain vote. This final stage requires meeting strict quorum and approval thresholds defined by the Aave protocol’s governance framework to enact the code changes and officially onboard the native Bitcoin collateral integration. The governance process ensures that token holders maintain ultimate control over risk parameters and protocol upgrades, maintaining the decentralized security model that underpins Aave’s operations across multiple blockchain networks.
