Aave Advances Native Bitcoin Loans After Unanimous Vote
Aave’s native BTC collateral plan passed a preliminary vote, with $21 million in proposed stablecoin credit lines and final onchain approval pending.
Key Notes
- Aave’s preliminary vote backed using native Bitcoin as collateral through Babylon vaults.
- The proposed initial stablecoin credit lines total $21 million.
- Final onchain approval and a staged mainnet rollout remain pending.
Aave has moved closer to letting Bitcoin holders borrow stablecoins while keeping their collateral on the Bitcoin network, after a governance vote backed integration with Babylon’s Trustless Bitcoin Vaults.
The Snapshot ballot closed on November 9 with 76 votes and all voting power cast in favor. The preliminary approval advances the proposal toward a final onchain governance decision. The borrowing service has not launched.
Bitcoin Collateral Would Stay on Bitcoin
Under the governance proposal, a holder locks BTC in a vault on Bitcoin. A corresponding record on Ethereum allows Aave V4 to recognize that collateral and lend supported assets against it.
The underlying BTC would remain in a Bitcoin transaction output governed by predefined spending conditions. Users would not need to send those coins to a custodian or exchange them for a freely traded wrapped-Bitcoin token.
Aave’s contracts would use a restricted ERC-20 representation for internal accounting. That record cannot be traded between users or moved outside the integration. It represents the locked vault position rather than a general-purpose Bitcoin wrapper.
The design addresses a different route to borrowing from products such as Ledger’s wrapped-Bitcoin loans, where borrowers pledge tokens backed by BTC held through an issuer’s custody arrangements.
Initial Credit Lines Would Total $21 Million
LlamaRisk’s assessment proposes a 78% collateral factor and initial stablecoin credit lines totaling $21 million from Aave’s Core Hub. The proposed allocations cover USDT, USDC, GHO, USDG and RLUSD.
Those amounts are lending limits for the planned integration. They are not deposits already collected or loans already issued. Governance would control changes to the limits as the market develops.
Babylon’s approval update also highlights a proposed zero collateral-risk premium. Borrowers would still pay Aave interest, and the integration can charge an additional Babylon fee on that interest. The zero premium does not make a loan interest-free.
Liquidation Still Connects Bitcoin and Ethereum
Native collateral does not eliminate wrapped tokens from every part of the system. The liquidation mechanism would initially use WBTC to settle liquidators, while designated arbitrageurs redeem the seized vaults for BTC on Bitcoin.
That separates fast liquidation settlement from the slower Bitcoin redemption process, which includes a multi-day claim-and-challenge window. Borrowers can still lose collateral if a position becomes unhealthy, and the system depends on its contracts, price feeds and proof-verification process.
Babylon targets a late-2026 mainnet rollout, subject to final approval and confirmation. It plans to begin with restricted participation and transaction volumes, with a detailed staged schedule still to come.
For Bitcoin holders, the proposal offers a potential route to Ethereum lending liquidity without handing the underlying coins to a custodian. The next milestone is the final governance authorization needed to turn that design into an operating market.
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