Aave proposal would add native Bitcoin collateral to V4

A proposal published October 14 asks Aave DAO to bring native BTC$81,669.00▼1.69% into V4 lending markets without wrapping the bitcoin or handing it to a custodian. The mechanism is Babylon’s Trustless Bitcoin Vaults protocol, and the full filing sits in the Aave Governance forum.

A BTC holder locks coins in a Taproot UTXO on the Bitcoin network, and that position backs stablecoin borrowing inside Aave V4. The proposal states the deposited BTC is neither wrapped nor bridged, and no custodian holds it. The BTC is not transferred to a third-party custodian while the collateral works inside Aave.

V4 only accepts ERC-20 tokens, so the native BTC position would be represented by a transfer-restricted ERC-20 that acts as an internal accounting unit. It carries eight decimals to match Bitcoin’s satoshi denomination and can only move between the integration’s own Aave contracts.

The architecture introduces two new Aave V4 Spokes: the Babylon Spoke, where native BTC is the sole collateral asset, and the BTC Vault Swap Spoke. Aave DAO governs both Spokes. Babylon governance representatives govern the underlying TBV contracts that lock the bitcoin. A separate 2-of-3 multisig composed of Llama Risk, Babylon Labs, and Aave Labs would configure the BTC Vault Swap Spoke.

That split creates a concrete risk boundary. Users sit between two separate governance systems, and the multisig adds a third configuration layer on top.

The liquidation path is also notable. Permissionless liquidators who acquire a BTCVault position can swap it for WBTC — the proposal designates WBTC as the wrapped BTC used at launch. A permissioned group of arbitrageurs handles the deeper layer: they can buy escrowed BTCVaults by repaying the borrower’s debt, then redeem the underlying BTC on Bitcoin.

Babylon was founded in 2022 by Stanford University Professor David Tse and Dr. Fisher Yu. Its Bitcoin staking protocol launched in August 2024 and, according to the Aave filing, has accumulated more than 100,000 BTC cumulatively staked, peaked at 72,000 BTC TVL, and currently holds approximately 40,772 BTC staked.

At CoinGecko’s $81,542 price for BTC, that current figure is worth roughly $3.32 billion: 40,772 × $81,542 = $3,324,630,424. It also represents 56.6% of Babylon’s stated peak — 40,772 ÷ 72,000 × 100.

The proposal arrives after an October 1, 2026 incident involving a third-party module used to loop positions on Aave V3. That contract, FlashLoopAdapter, was exploited for approximately 114.09 ETH — worth about $307,065 at the time of the transaction. Aave’s pools were reported not to be affected, and the incident doesn’t establish any defect in the proposed V4 design. But it does make the governance and contract boundaries between Aave’s Spokes, Babylon’s TBV system, and the configuration multisig less abstract for anyone evaluating what goes wrong and who fixes it.