Bitcoin-focused developer Babylon Labs has officially submitted a formal governance proposal to the Aave decentralized autonomous organization, seeking to allow users to borrow stablecoins against native Bitcoin. The development marks a significant step forward in bridging the gap between the Bitcoin network and the decentralized finance ecosystem on Ethereum and other compatible blockchains, offering an alternative to traditional wrapped asset models that rely heavily on centralized custodians.
Under the architectural design of the proposal, users would lock their native Bitcoin directly into dedicated vaults located on the Bitcoin network. Rather than transferring or bridging the underlying asset to another blockchain, the Bitcoin remains securely locked on its native chain. To enable lending and borrowing activity within Aave’s liquidity markets, a specialized non-transferable token minted on the Ethereum network would be issued to represent the collateral position. This mechanism aims to preserve the foundational security and sovereign nature of Bitcoin while unlocking liquidity for holders who wish to access stablecoins without selling their primary crypto assets.
The latest proposal, submitted on a Wednesday, follows a series of foundational governance steps that began earlier in the year. According to information shared by Babylon Labs, the initiative originated with an initial temp check submission on May 25, which laid the groundwork for further technical and community discussions. This was followed by a preliminary community vote that successfully passed on June 10, demonstrating early support among Aave stakeholders for exploring trustless Bitcoin integration models.
As part of the economic framework outlined in the recent proposal, the Aave DAO stands to benefit directly from the integration. Specifically, the DAO would receive the first $500,000 in qualifying annual revenue generated by the Babylon integration, providing a clear financial incentive for the protocol to adopt the new vault technology.
The introduction of native Bitcoin collateral represents a potential evolution in how decentralized lending protocols handle the world’s largest cryptocurrency by market capitalization. Currently, Aave already supports various forms of loans against tokenized Bitcoin through assets such as Wrapped Bitcoin and Coinbase Wrapped Bitcoin. While these wrapped assets have successfully brought billions of dollars in Bitcoin liquidity into the decentralized finance sector, they inherently rely on centralized or federated custodians to hold and secure the underlying Bitcoin. This reliance introduces structural counterparty risks, including custodial failure, regulatory interference, or technical vulnerabilities associated with bridging protocols. By utilizing trustless vaults on the Bitcoin network, the Babylon Labs proposal seeks to mitigate these counterparty risks by keeping the underlying asset on its native chain.
As of Thursday, the proposal remains actively positioned at the Aave Request for Comment stage. During this phase, the community provides ongoing feedback, and rigorous risk analyses are conducted by independent risk service providers and contributors to evaluate the potential smart contract, economic, and operational implications of integrating native Bitcoin vaults into the Aave ecosystem.
Should the proposal achieve broad community consensus during the ARFC phase, it will be eligible to proceed through the established multi-step governance pipeline. This includes advancing to a three-day offchain Snapshot vote. According to Aave’s governance rules, this offchain phase requires a minimum threshold of at least 320,000 AAVE-equivalent votes cast in favor before the initiative can progress to a formal onchain vote. Following a successful Snapshot phase, the proposal would be submitted as a formal onchain smart contract execution vote, which must meet strict quorum and approval requirements to be officially enacted within the protocol.
