Aave Labs has proposed a new isolated lending market for Aave V4 that would enable institutional borrowers to borrow stablecoins against Bitcoin held in custody with Anchorage. The proposal aims to bridge regulated custody services with onchain lending infrastructure.
Under the structure, Anchorage would retain custody of the collateral while Chainlink's infrastructure synchronizes the custodian's records with Aave's protocol. Borrowers would not need to move their assets out of custody to participate.
How the System Works
The collateral would be represented onchain through a Custodied Collateral Token, or CoCT, which functions as an accounting unit rather than a tradable asset or direct claim on the underlying Bitcoin.
Chainlink's CustodySync would manage the creation and destruction of CoCT tokens and reconcile supply with the balances reported by Anchorage. Chainlink would also provide price feeds and Proof of Reserve infrastructure, as well as synchronize loan lifecycle events between the custodian and Aave.
Isolated Market Structure
Aave V4's Hub-and-Spoke architecture would allow the custodied collateral market to operate in isolation. A dedicated Hub would provide stablecoin liquidity, while a dedicated Spoke would accept CoCT as collateral and draw liquidity from the Hub.
This isolation prevents the custodied collateral market from exposing other Aave reserves to risk. Aave DAO governance would maintain control over collateral listings, borrowing caps, and other risk parameters.
Loan Lifecycle and Liquidations
The proposed loan cycle would cover borrowing, repayment, collateral additions, margin returns, and liquidation through the CustodySync bridge. Stablecoins would transfer atomically to borrowers upon loan initiation, while repayments reduce debt without automatically releasing collateral.
In the event of liquidation, Anchorage would conduct an over-the-counter sale of the underlying collateral and use proceeds to settle the Aave position. Partial liquidations would also be supported.
Next Steps
The initial proposal would list one CoCT representing Bitcoin in Anchorage custody. Future borrower positions could use the same architecture. Final risk parameters have not yet been determined and would be recommended by Aave's risk service providers before an Aave Improvement Proposal, or AIP, is submitted.
If the Aave Request for Comment gains community support, the proposal would advance to Snapshot voting and then to onchain governance approval.
