Aave’s proposal to allow borrowers to use native Bitcoin as collateral for stablecoin loans received 100% support in a preliminary governance vote on November 9, according to a report from Babylon Labs. The vote cleared the first step toward connecting Babylon’s Trustless Bitcoin Vaults to Aave V4.
Proposed market structure
Under the plan, Bitcoin would remain locked on the Bitcoin blockchain while an Ethereum‑based accounting record would enable Aave to recognize the collateral. Borrowers would not need to supply Wrapped Bitcoin (WBTC) directly. The proposal sets initial stablecoin credit lines from Aave’s Core Hub liquidity pool at $8 million each for USDT and USDC, $1 million for GHO, and $2 million each for USDG and RLUSD.
A separate Babylon Hub would allow liquidity providers to expose themselves to native Bitcoin collateral, with its own limits. Risk adviser LlamaRisk recommends a 78 % collateral factor for native Bitcoin.
Liquidation and settlement mechanics
Even with Bitcoin locked on its native chain, liquidation risk remains. The Ethereum accounting unit representing the Bitcoin collateral would be non‑transferable, but borrowers could still lose the vault’s Bitcoin through liquidation.
Wrapped Bitcoin retains a role in the design. In a permissionless liquidation scenario, a BTCVaultSwap contract would borrow WBTC from an Aave Hub to settle with liquidators immediately. Permissioned arbitrageurs would later repay the debt and redeem the underlying Bitcoin over several days. The Core Hub draw cap for this settlement venue is set at 100 WBTC.
Next steps and timeline
The proposal now requires an Aave Improvement Proposal (AIP) for final on‑chain approval. Babylon Labs targets a late‑2026 mainnet launch, subject to change. Deployment is expected to start with restrictions on participants and volume, with a staged rollout plan to be announced.
Until final approval and a confirmed rollout schedule are in place, the market remains unavailable on mainnet.
