Key Takeaways
Babylon Labs has submitted a proposal to integrate its trust-minimized Bitcoin vault system with Aave V4, a move that would allow native Bitcoin to be used as collateral in DeFi without relying on custodial bridges or wrapped tokens. The proposal, posted to the Aave governance forum on May 25, is currently in a "temperature check" phase to gather community feedback.
"This is the first novel Spoke implementation proposal for Aave V4," Aave founder Stani Kulechov said in a post on X, publicly endorsing the plan. He noted that Babylon already has more than $4 billion in BTC staked that could eventually serve as collateral within the Aave ecosystem on Ethereum.
The proposed integration avoids traditional wrapped Bitcoin designs by keeping the underlying BTC locked on the Bitcoin network itself through Taproot-based vault scripts. A non-transferable accounting asset, vaultBTC, would be created on Ethereum to represent the collateral within Aave V4. The system is designed with two main components: a Core Lending Spoke for borrowing and a separate BTC Vault Swap Spoke to handle liquidations and delayed settlement flows from the Bitcoin network.
This push for a trust-minimized architecture arrives at a critical time for DeFi lending protocols. In April 2025, the Aave ecosystem suffered approximately $190 million in bad debt from an exploit involving a cross-chain bridge, according to security analysts. Babylon's proposal directly addresses such risks by eliminating bridges and multisig custodians, instead relying on cryptographic proofs and challenge periods to secure collateral across chains. The plan aligns with Aave's recently stated 12-month strategy to focus on sustainable revenue and expand the utility of its V4 architecture.
If approved, the integration would represent a significant step toward bringing Bitcoin's substantial liquidity into Ethereum-based DeFi markets through a more secure and decentralized framework. The proposal must still undergo further reviews, risk assessments, and on-chain voting before any deployment could occur.
This article is for informational purposes only and does not constitute investment advice.
