The request for comment would add two new Spokes to Aave V4, one for borrowing stablecoins against bitcoin held in Babylon's vaults and one for settling liquidations. Risk parameters are not in the paper, and Aave DAO would take the first $500,000 of annual revenue from the market before sharing any with Babylon.
Babylon Labs has asked Aave's governance forum to accept native bitcoin as collateral on Aave V4, in a request for comment published on October 14 that would add two new Spokes to the protocol. The proposal would let borrowers take loans against bitcoin that stays inside Babylon's Trustless Bitcoin Vaults, represented on Aave by a token that cannot be transferred rather than by a wrapped claim that circulates.
The paper is an Aave Request for Comment, a stage that follows a temperature check the forum says has passed and precedes both a Snapshot vote and a formal improvement proposal. Its own next steps are community feedback and a risk analysis, then Snapshot if the DAO reaches consensus, then an Aave Improvement Proposal carrying full risk parameters. No voting date appears in the thread, and one account of the proposal notes that it sets no deployment date.
Aave V4 went live on Ethereum in April with a hub-and-spoke design that pools liquidity centrally and lends it out through separate markets. Inside the first of the two proposed Spokes, the Babylon Spoke, native bitcoin would be the only accepted collateral, and it could not be borrowed. The position is represented on Ethereum, the initial host chain, by a transfer-restricted ERC-20 token with eight decimals, matching bitcoin's own precision. Borrowing stablecoins against that balance is the first use case the paper describes.
The second Spoke exists because of a timing problem specific to bitcoin. Unlocking the vault scripts that hold the collateral involves multi-day challenge windows verified with zero-knowledge proofs, so a liquidator cannot simply take the underlying coin at the moment a loan falls below its threshold. The BTC Vault Swap Spoke works around that by borrowing WBTC from the Aave V4 Hub to pay liquidators immediately, leaving arbitrageurs to buy back the seized vaults and redeem them on the Bitcoin chain afterward.
The same gap between holding bitcoin collateral and being able to realize it has appeared outside DeFi. A South Korean lender took bitcoin as loan security this month under an arrangement that leaves it unable to seize the coin directly, and must obtain a court-ordered sale instead. Aave's proposed answer is mechanical rather than contractual: borrow a wrapped substitute now, settle the real asset later.
Several settings are fixed in the paper rather than left to risk modeling. The liquidation fee is zero, the option for liquidators to receive shares is disabled, the target health factor is removed, and the Spoke applies no dust threshold. The swap Spoke has three configurable values, a sell discount, a minimum profit reserved for arbitrageurs, and a fee recipient, and the Crypto Times report states that a two-of-three multisig of Llama Risk, Babylon Labs and Aave Labs would hold the configuration role.
What the paper does not contain is the set of numbers that would decide how much a borrower could draw. Loan-to-value ratios, liquidation thresholds, supply and borrow caps, the liquidation bonus and the oracle configuration are all absent, and the paper states that risk parameters for both Spokes will be supplied by Aave's risk service providers. Babylon's own charge is described only as a percentage of the borrower's base Aave interest, with no rate attached.
The first $500,000 of qualifying revenue each year would go entirely to Aave DAO. Above that the split moves through four bands: 78% to the DAO, 18% to Babylon and 4% to token purchases between $500,000 and $2 million; 72.5%, 22.5% and 5% up to $4 million; 67%, 27% and 6% up to $6 million; and 61.5%, 31.5% and 7% beyond it. Qualifying revenue covers the Hub's liquidity fee on Babylon Spoke interest together with liquidation fees from the adapter and the swap Spoke. Token purchases would be 85% AAVE and 15% BABY, divided equally between Aave DAO and the Babylon Foundation according to the Crypto Times account.
Babylon's bitcoin staking system opened in August 2024 and has taken in more than 100,000 bitcoin since, of which it managed about 40,772 as of October 14, worth roughly $3.37 billion on the figures in the Crypto Economy report. Those figures describe the staking system rather than the vault product the proposal relies on, and the paper does not say how much bitcoin would be available to an Aave market.
Aave has been widening what it accepts as collateral. In September the protocol opened a USDC market backed by seven Coinbase stock tokens. Native bitcoin would be a harder addition, because it settles on a chain Aave's contracts do not run on, which is why the proposal needs a vault, a wrapped substitute and an arbitrage loop rather than a single new asset listing.
Support in the thread came quickly. An account posting as stani replied half an hour after publication, calling native bitcoin "the largest pool of idle collateral in crypto," and two further replies backed the integration, the last of them a day later. None of that changes the stage. With no risk parameters, no Snapshot vote scheduled and no improvement proposal filed, the DAO has not yet been asked to approve anything binding.
