Babylon Labs' proposal for a native Bitcoin lending market on Aave V4 would rely on Wrapped Bitcoin (WBTC) for critical settlement functions, despite allowing borrowers to keep Bitcoin in a vault, according to a pre-listing assessment by risk assessor LlamaRisk published on October 23.
Two Liquidation Routes, Three Payment Requirements
The proposal outlines two liquidation paths. Through the Liquidation Liquidity Provider (LLP) route, external liquidators would repay borrower debt and receive WBTC payouts from Aave's shared liquidity pool. An authorized keeper could then purchase the seized vault and handle Bitcoin redemption.
A second direct route would allow keepers with Bitcoin redemption rights to fund debt repayment and handle redemption independently, bypassing the shared liquidity pool but still requiring WBTC for certain obligations.
Both routes face three payment requirements: debt repayment, an application liquidation fee assessed at 0.5% of liquidation bonus profit, and any fairness payment owed to borrowers when seized collateral exceeds the debt owed.
WBTC Settlement Constraints
The assessment notes that when Aave's Hub WBTC allowance runs out, keepers can avoid that funding constraint only if equipped and authorized to supply the required payments from their own inventory. However, WBTC-denominated fees and borrower surplus payments remain mandatory even on the direct route.
Loan repayment uses the token of the borrower's selected debt reserve, but if the borrower owes WBTC, the keeper must transfer WBTC to repay the loan even when application fees and borrower-surplus payments are zero.
Implementation Status and Launch Plans
LlamaRisk's assessment noted that integration contracts had not been deployed on Ethereum mainnet as of October 23. Babylon's contract directory identified its published addresses as Sepolia testnet deployments as of October 25.
The assessment recommends an initial 100 WBTC credit line for the LLP route, separate from a proposed 300 BTC collateral launch cap. The envisioned initial rollout includes 10 allowlisted borrowers and 50 vaults alongside permissioned Bitcoin redemption operators.
The lending line would determine available funding for the LLP route. Beyond that capacity, the direct fallback would rely on keepers repaying debt and meeting any WBTC obligations, with the extent depending on final fee settings, debt assets, and vault composition.
