Published: Oct 15, 2026
Bitcoin-focused developer Babylon Labs has advanced to a new governance stage with its ambitious proposal designed to allow decentralized finance users to borrow stablecoins on the Aave lending protocol using native Bitcoin as collateral.
Under the technical framework of the proposal, users would securely lock their Bitcoin into specialized vaults directly on the Bitcoin network while simultaneously borrowing against that value on Aave. To bridge the architectural gap between the two distinct blockchain ecosystems, a non-transferable token minted on the Ethereum network would represent the underlying collateral. Crucially, the actual Bitcoin would remain secure on its native blockchain without ever needing to be bridged, wrapped, or subjected to third-party custody solutions that have historically introduced vulnerabilities to the decentralized finance sector.
The latest governance progression arrives following an initial formal submission introduced to the community on May 25, which was subsequently followed by a preliminary community temperature check vote that successfully passed on June 10, according to public disclosures from Babylon Labs. The continuous progression of the initiative highlights a growing appetite within major decentralized finance protocols to integrate Bitcoin liquidity directly into lending markets without sacrificing the core security properties native to the world’s largest cryptocurrency by market capitalization.
As part of the economic terms outlined in the proposal, the Aave decentralized autonomous organization would stand to benefit substantially from the integration. Specifically, the Aave DAO would receive the first $500,000 in qualifying annual revenue generated by the native Bitcoin vault integration, aligning the financial incentives of both protocols and providing a direct revenue stream to the Aave ecosystem.
The initiative addresses a long-standing limitation within the decentralized finance ecosystem regarding how Bitcoin is utilized as collateral. Currently, Aave supports loans against tokenized representations of Bitcoin, most notably through assets such as Wrapped Bitcoin and Coinbase Wrapped Bitcoin. While these wrapped assets have successfully unlocked billions of dollars in liquidity across various decentralized finance applications, they inherently rely on centralized or federated custodians to hold and manage the physical Bitcoin backing the tokens. This reliance introduces varying degrees of counterparty risk, regulatory uncertainty, and trust assumptions that many purists and risk-conscious institutional investors seek to avoid. By bypassing wrapped assets entirely through cryptographic vault integration, Babylon’s approach aims to eliminate these external custody risks.
As of Thursday, the proposal remains actively situated at the Aave Request for Comment stage of the protocol’s governance lifecycle. During this critical phase, the initiative is subjected to rigorous community feedback, technical scrutiny, and comprehensive risk analysis from risk management entities associated with the Aave ecosystem to ensure that protocol security and solvency will not be compromised by the addition of a new collateral type.
Should the proposal successfully navigate the review process and achieve broad community consensus, it will be cleared to proceed to a subsequent three-day offchain Snapshot vote. According to Aave’s established governance rules, this offchain phase requires a minimum threshold of at least 320,000 AAVE-equivalent votes cast in favor before the initiative can officially advance to a formal onchain governance vote.
Following the completion of the Snapshot phase, the final onchain vote must strictly adhere to and meet all specified quorum and approval requirements mandated by the Aave protocol to achieve ultimate ratification and eventual deployment into the upcoming Aave V4 environment.
