Babylon Labs submitted an Aave Request for Comment governance proposal on October 14, 2026, to allow users to borrow stablecoins on Aave V4 using native Bitcoin collateral. Utilizing Babylon's Trustless Bitcoin Vaults, BTC remains locked in Taproot UTXOs on the Bitcoin network without custodians, mapped via an accounting token called vaultBTC. The plan introduces dedicated lending and swap spokes to settle liquidations instantly in WBTC.
Proposal timeline and voting process
- ▪Babylon Labs initially announced its partnership with Aave on December 3, 2025, followed by a DAO temperature check proposal that passed in June 2026 after starting on May 25, 2026.
- ▪Babylon Labs published an Aave Request for Comment proposal on October 14, 2026 to allow users to borrow stablecoins on Aave V4 against native Bitcoin collateral.
- ▪Advancing the proposal from the ARFC stage to an onchain vote requires passing a three-day offchain Snapshot vote with at least 320,000 AAVE-equivalent votes in favor.
Aave DAO terms and authority
- ▪Under the proposed integration, Aave DAO would receive the first $500,000 in qualifying annual revenue generated by the Babylon Trustless Bitcoin Vaults integration.
- ▪Aave DAO retains full governance control over lending parameters, including loan-to-value ratios, collateral requirements, interest rate strategies, and liquidation rules.
Collateral representation and lending architecture
- ▪The proposed integration introduces the Babylon Core Lending Spoke to Aave V4, where borrowers post vault-backed Bitcoin to draw supported assets like USDC, USDT, and WBTC.
- ▪To enable Aave V4 to track collateral on Ethereum, the integration creates a transfer-restricted ERC-20 token named vaultBTC as an internal accounting record representing locked Bitcoin on a one-to-one basis.
- ▪Babylon's Trustless Bitcoin Vaults protocol locks Bitcoin in self-custodial Taproot-based UTXOs directly on the Bitcoin network without transferring custody to third-party custodians.
Liquidation settlement process
- ▪To bypass multi-day Bitcoin redemption delays, permissionless liquidators using the BTC Vault Swap Spoke receive Wrapped Bitcoin (WBTC) immediately while authorized participants complete native Bitcoin settlement.
- ▪The BTC Vault Swap Spoke is introduced as a second component in Aave V4 specifically to manage the settlement process for liquidated Bitcoin collateral.
- ▪Authorized arbitrageurs acquire escrowed vaults in the liquidation process by repaying the outstanding WBTC debt plus accrued interest before redeeming underlying BTC on the Bitcoin network.
Bitcoin collateral settlement constraints
- ▪Redeeming a native Bitcoin vault during collateral settlement can take several days due to a required challenge period on the Bitcoin network.
- ▪Because individual Bitcoin transaction outputs cannot be divided, liquidations target one BTCVault at a time, allowing liquidators to make repeated calls until position health is restored.
Component governance controls
- ▪Babylon's governance representatives will manage the underlying Trustless Bitcoin Vaults protocol configuration, including emergency controls and participating actor sets.
- ▪A 2-of-3 multisig consisting of Llama Risk, Babylon Labs, and Aave Labs holds a configuration role for the BTC Vault Swap Spoke on Aave V4.
Integration security audits
- ▪Six security firms participated in audit work covering the Babylon integration components, including Coinspect, Sherlock, Zellic, ABDK, ZK Security, and Runtime Verification.
- ▪Babylon is conducting another audit round on finalized integration changes with Coinspect, ABDK, and Zellic prior to mainnet deployment.
HashKey Cloud integration
- ▪HashKey Cloud clients will also be able to deploy stablecoins borrowed through the integration into yield strategies.
- ▪HashKey Cloud announced on October 7, 2026 that it will integrate Babylon Trustless Bitcoin Vaults to enable native Bitcoin-backed borrowing via Aave V4 for institutional clients.
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