Aave V4 May Add Trustless Bitcoin Vaults Under Babylon Labs Proposal

Aave V4 may add Babylon Trustless Bitcoin Vaults, enabling native BTC collateral through two proposed Spokes.

Babylon Labs has submitted a Temperature Check to Aave DAO for a possible Aave V4 integration.

The proposal seeks community input on adding Trustless Bitcoin Vaults, which would let users borrow against native BTC.

The plan would use two new Aave V4 Spokes and would avoid wrappers, bridges, or custodians.

Babylon Proposes Native BTC Collateral For Aave V4

Babylon Labs proposed two new Aave V4 Spokes for the integration. These are the Babylon Core Lending Spoke and the BTC Vault Swap Spoke.

The Core Lending Spoke would allow users to borrow against native BTC collateral. The BTC Vault Swap Spoke would support post-liquidation settlement and collateral conversion.

The proposal focuses on Trustless Bitcoin Vaults, also called TBV. In this model, depositors lock BTC in a Taproot UTXO on Bitcoin.

Redemption depends on on-chain rules, such as whether a borrower has repaid a loan. Settlement then returns BTC directly to a Bitcoin UTXO controlled by the redeeming party.

Trustless Bitcoin Vaults Avoid Bridges And Custodians

Babylon said TBV allows native Bitcoin to be used in DeFi without third-party custody. The BTC stays on Bitcoin and is locked through Taproot script conditions.

The system uses zero-knowledge proofs to verify events on a host chain, such as Ethereum.

If a claim lacks a valid proof, it can be challenged during a fraud-proof window. The depositor is always eligible to act as a challenger.

This means users do not need to trust a separate party to defend their BTC.

For Aave V4, vault records would be represented as vaultBTC through adapter contracts.

Since Aave V4 accepts ERC-20 collateral, vaultBTC would represent Bitcoin vault records one-to-one.

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Aave V4 Architecture Supports Custom Spokes

Babylon said Aave V4 is suitable because of its Hub-and-Spoke design. This structure allows isolated integrations without affecting other Hub assets.

The lending Spoke would handle loans backed by native BTC collateral. Meanwhile, the swap Spoke would convert seized BTC collateral to WBTC after liquidations.

Aave DAO would retain control over caps, parameters, and risk settings for both Spokes. This keeps the integration under governance oversight.

Babylon said its Bitcoin staking protocol has activated more than 100,000 BTC cumulatively since August 2024. It also reached a peak TVL of 72,000 BTC and currently holds about 51,000 BTC.

The proposal now awaits community review through Aave governance. If advanced, it could bring native BTC-backed borrowing to Aave V4.

The post Aave V4 May Add Trustless Bitcoin Vaults Under Babylon Labs Proposal appeared first on Live Bitcoin News.