Babylon Proposes Native Bitcoin Collateral on Aave V4 Without Moving BTC Out of Users’ Wallets

Babylon Labs has submitted an Aave Request for Comment (ARFC) to bring native Bitcoin collateral to Aave V4 while keeping the underlying BTC under the owner’s control. The proposal argues that borrowers would no longer need to hand assets to custodians, multisig groups, or wrapped-BTC issuers. Instead, Bitcoin would remain locked in a Taproot output controlled by pre-signed spending paths and a challenge process that relies on a single honest challenger, which can be the BTC holder. The proposal says Babylon’s BaBe proof system cuts Bitcoin-side dispute costs to $37.82 from BitVM2’s $14,211 and reduces per-vault setup data from 40.5 GiB to 22.2 MiB. On Aave V4, a dedicated Babylon Spoke would accept native BTC as collateral, while a Swap Spoke would use idle WBTC liquidity from Aave’s Hub to settle liquidations. The temperature check has already passed with 299,743 AAVE in favor and zero against. Before any mainnet launch, the plan still needs risk and technical reviews, a Snapshot vote, an onchain AIP, and a fresh audit cycle. The article also outlines how revenue would be split, with Aave keeping the first $500,000 in annual qualified revenue and at least 61.5% of revenue above that threshold.