Babylon Labs Proposes Native Bitcoin Collateral for Stablecoin Loans on Aave
Bitcoin developer Babylon Labs has submitted a proposal to allow users to borrow stablecoins on decentralized lending platform Aave (AAVE) using native Bitcoin (BTC). Under the proposed design, borrowers lock their Bitcoin in vaults on its native blockchain and receive loans on Aave, while a non-transferable token on Ethereum represents the collateral without requiring coins to be bridged or wrapped.
Existing Bitcoin loans on Aave rely on wrapped assets such as Wrapped Bitcoin or Coinbase Wrapped Bitcoin. These tokenized alternatives depend on third-party custodians, creating counterparty risk for borrowers. Allowing direct collateralization on the Bitcoin network removes reliance on central custodians. In addition, the proposal allocates the first $500,000 in qualifying annual generated revenue directly to the Aave DAO.
The proposal is currently in the Aave Request for Comment phase for community review and risk assessment. If approved, it will advance to a three-day offchain Snapshot vote needing 320,000 voting units in favor, followed by a binding onchain governance vote. Aave was trading down 2.58% at $150.30 USD.
Key points
- Babylon Labs submitted a proposal to enable stablecoin borrowing on Aave against native Bitcoin locked on its original network.
- The design uses a non-transferable Ethereum token as collateral representation, avoiding wrapped Bitcoin and custodian risk.
- Under the proposed terms, the Aave DAO would receive the first $500,000 in qualifying annual revenue generated by the integration.
- The proposal is in the comment stage and must pass an offchain Snapshot vote and an onchain governance vote to be implemented.
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How we writeDisclaimerQuestions and answers
How does Babylon Labs propose using native Bitcoin on Aave?
Users lock their Bitcoin in vaults on the Bitcoin network and borrow stablecoins on Aave. A non-transferable token on Ethereum represents the collateral, keeping the Bitcoin on its native chain without bridging or wrapping.
How does native Bitcoin lending differ from Wrapped Bitcoin on Aave?
Wrapped Bitcoin tokens rely on centralized custodians to hold the underlying Bitcoin, introducing counterparty risk. Native Bitcoin collateral stays on the Bitcoin blockchain, avoiding reliance on wrapped token custodians.
What voting steps are needed for the Aave Bitcoin proposal to pass?
The proposal must pass community discussion, a three-day offchain Snapshot vote requiring at least 320,000 favorable votes, and a final onchain vote meeting quorum and approval criteria.