Bitcoin-focused developer Babylon Labs has formally submitted a proposal designed to allow users to borrow stablecoins on the decentralized finance lending giant Aave using native Bitcoin as collateral, potentially bridging two of the largest ecosystems in the cryptocurrency market without relying on traditional wrapped assets.
Under the proposed mechanics, users would lock their native Bitcoin within specialized vaults securely maintained on the Bitcoin blockchain, allowing them to borrow against that locked capital on the Aave protocol. To track and manage the collateral, a non-transferable token minted on the Ethereum network would serve as a representation of the underlying Bitcoin position. Meanwhile, the actual Bitcoin would remain securely stored on its native blockchain network, entirely avoiding the traditional requirement of being bridged or wrapped through third-party protocols.
This latest development arrives following an initial submission introduced on May 25, which successfully passed a preliminary community sentiment vote on June 10, according to public updates shared by Babylon Labs. The formal proposal indicates that the Aave Decentralized Autonomous Organization would stand to benefit financially from the integration, receiving the first $500,000 in qualifying annual revenue generated by the system.
Currently, the Aave lending marketplace already accommodates loans backed by tokenized forms of Bitcoin through prominent assets such as Wrapped Bitcoin and Coinbase Wrapped Bitcoin. However, these established wrapped solutions fundamentally rely on centralized or federated custodians to hold and secure the underlying physical Bitcoin. That structural dependency inevitably introduces distinct counterparty risks, ranging from potential custodian insolvency to operational vulnerabilities or regulatory seizures. By contrast, the approach championed by Babylon Labs seeks to minimize these centralized vectors by keeping the core asset anchored securely on the Bitcoin network itself.
As of Thursday, the proposal remains actively positioned at the Aave Request for Comment stage, where it is undergoing rigorous community feedback, technical scrutiny, and comprehensive risk analysis from risk managers and ecosystem participants.
Should the proposal manage to build sufficient community consensus during this foundational phase, it will be cleared to proceed toward a three-day offchain Snapshot vote. According to Aave’s established governance rules and operational guidelines, this offchain polling phase requires at least 320,000 AAVE-equivalent votes cast in favor of the initiative before it can officially advance to a formal onchain vote. Following that milestone, any subsequent onchain vote must successfully satisfy strict quorum requirements and approval thresholds to be fully enacted within the protocol.
