Babylon Labs 14 October 2026, presented a new governance proposal that will allow BTC holders to borrow stablecoins through Aave without selling their BTC, moving the coins to another blockchain, or handing them over to a custodian.
Babylon Labs has published a proposal on the Aave governance forum, promoting an integration first discussed in May. The plan provides for the introduction of two specialized components for borrowing against BTC and liquidating loans. The integration still requires community approval, final configuration of lending risks, and additional security checks before launch.
Babylon offers lending using BTC without wrapping
The proposal provides for implementing Babylon's Trustless Bitcoin Vaults technology in Aave V4, the latest version of the decentralized lending protocol.
Under the proposed system, Bitcoin owners will deposit BTC into special vaults operating directly in the Bitcoin blockchain. Their coins will remain locked in Bitcoin while securing loans issued through Aave.
Borrowers can then access stablecoins using the value of their deposited bitcoins, in accordance with lending rules and collateral requirements that will ultimately be approved by Aave's governance.
This process differs from existing Bitcoin lending schemes on Aave, which support assets such as Wrapped Bitcoin (WBTC) and Coinbase Wrapped Bitcoin (cbBTC).
"Wrapped" bitcoin products are tokens issued on another blockchain to represent BTC held under a separate scheme. The ownership and custody structure depends on the specific product.
Babylon proposes avoiding this structure by keeping the original BTC in Bitcoin throughout the entire loan term.
The technology uses the Taproot system to restrict the movement of deposited coins. Transactions involving the vault must satisfy predefined conditions before the locked BTC can be unlocked.
In Babylon's proposal, this process is described as "without transferring ownership to any trusted third party." Although the coins will remain in Bitcoin, Aave needs a way to recognize the collateral in its Ethereum-based lending system.
Therefore, the developers propose using a restricted accounting token ERC-20, representing the value of each vault in BTC. The token will exist solely within the integration. Users will not be able to freely transfer, exchange, or store it outside the specified contracts.
Babylon clarifies that the accounting token will represent locked BTC on a one-to-one basis. Its supply will increase when a vault is activated and decrease when collateral exits the lending position.
The previously launched Bitcoin vault technology from Babylon introduced the protocol's approach to using native BTC in decentralized finance without traditional custody mechanisms.
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