Bitcoin-focused developer Babylon Labs has officially submitted a formal proposal aimed at allowing cryptocurrency users to borrow stablecoins on the decentralized finance lending giant Aave by using native Bitcoin as collateral.
The move represents a significant potential expansion for both the Bitcoin ecosystem and decentralized lending markets, offering a way to leverage the world’s largest cryptocurrency by market capitalization without relying on traditional wrapped or bridged asset structures.
Under the hood of the proposed integration, users would lock their native Bitcoin directly into dedicated vaults located on the Bitcoin network and subsequently borrow stablecoins against that locked capital on the Aave protocol. To bridge the ecosystem gap between the two different blockchains, a specialized non-transferable token minted on the Ethereum network would be utilized to represent the underlying Bitcoin collateral. Meanwhile, the actual native Bitcoin itself would safely remain on its original blockchain infrastructure, completely avoiding the need to be bridged or wrapped through traditional third-party methodologies.
This latest Wednesday proposal follows an initial submission that was introduced to the community on May 25. That initial step was subsequently followed by a preliminary community governance vote that successfully passed on June 10, according to public updates provided by Babylon Labs.
As part of the economic framework outlined in the formal proposal, the Aave decentralized autonomous organization, or DAO, would stand to receive the first $500,000 in qualifying annual revenue generated directly by the integration. This revenue-sharing structure is designed to align the economic incentives of both the Aave DAO and the Babylon Labs development team, ensuring that the protocol benefits directly from the influx of new native Bitcoin collateral and the subsequent borrowing activity.
Currently, the Aave lending protocol already supports various forms of loans against tokenized Bitcoin through established assets such as Wrapped Bitcoin and Coinbase Wrapped Bitcoin, commonly referred to by their respective tickers WBTC and cbBTC. However, these traditional wrapped tokens fundamentally rely on centralized or federated custodians to hold and secure the physical or native Bitcoin underlying the tokens. This reliance on intermediaries inherently introduces various degrees of counterparty risk, including potential custodial failure, regulatory complications, or operational disruptions. By eliminating the wrapping and bridging process, the Babylon Labs proposal seeks to offer a trust-minimized alternative for Bitcoin holders who want to access liquidity without parting with their core holdings.
As of Thursday, the proposal remains actively situated at the Aave Request for Comment stage, widely known as the ARFC stage. During this phase, the initiative is undergoing rigorous community feedback, technical scrutiny, and comprehensive risk analysis from risk management contributors and community delegates within the Aave ecosystem.
Should the proposal manage to successfully achieve broad community consensus during the ARFC phase, it will be permitted to proceed to a subsequent three-day offchain Snapshot vote. According to the official governance rules and documentation provided by Aave, this offchain phase requires a minimum threshold of at least 320,000 AAVE-equivalent votes cast in favor of the measure before it can officially advance to a formal onchain vote.
Following the successful completion of the Snapshot phase, any subsequent onchain vote must still strictly meet all established quorum and approval requirements mandated by Aave’s decentralized governance framework to be fully enacted and deployed within the protocol.
