Babylon Proposes Native Bitcoin Collateral for Aave V4
Babylon has advanced a proposal to allow Bitcoin holders to use native BTC as collateral on Aave V4 while keeping assets on the Bitcoin blockchain. The mechanism would use WBTC for settlement of liquidations, with risk parameters and governance votes still pending.
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The Proposal
Babylon has submitted a formal proposal to enable native Bitcoin collateral on Aave V4, allowing BTC holders to borrow against their holdings without transferring custody to a wrapped token bridge. Under the plan, collateral would remain on the Bitcoin network, with WBTC used solely as the settlement layer for permissionless liquidations when a position falls below its required collateralization ratio.
How It Works
The design separates collateral custody from settlement mechanics. A user's Bitcoin stays in their self-custody or on Bitcoin L2 infrastructure, but liquidation transactions would execute via Ethereum's WBTC rails to ensure atomic settlement on Aave's mainnet deployment. This approach addresses a key friction point in current DeFi: the need for wrapped tokens or custodial bridges to participate in lending protocols.
Next Steps
Babylon's proposal requires approval of risk parameters—including liquidation thresholds, reserve factors, and collateral caps—before a community governance vote can proceed. The team has not yet released final risk settings. If approved, the mechanism could expand Aave's addressable market to Bitcoin holders who previously avoided DeFi due to custodial concerns.
Why It Matters
For Traders
If approved, this opens a new collateral source for Aave borrowing and could increase WBTC utility as liquidation settlement, altering liquidation dynamics on mainnet.
For Investors
Native BTC collateral without custodial wrapping could materially expand Aave's total value locked and shift competitive positioning in Bitcoin-native DeFi.
For Builders
The settlement-layer separation between custody and liquidation creates a new design pattern for multi-chain collateral that other protocols could replicate.
This article is for information only and is not financial advice. Read the full disclaimer.
