Babylon Labs has put forward a proposal to let Aave V4 accept native Bitcoin as collateral for stablecoin loans without using wrapped Bitcoin or third-party custody. Under this design, users would lock their Bitcoin in Trustless Bitcoin Vaults, while Aave recognizes a non-transferable marker on Ethereum used only for internal accounting inside Aave’s contracts. That marker does not circulate like a normal ERC-20 asset, so Babylon’s model avoids introducing a freely transferable synthetic version of Bitcoin.
For Aave, that changes the core governance question. Instead of evaluating Bitcoin as just another token listing, the proposal shifts attention to collateral design and risk modeling around vault-locked Bitcoin. Babylon’s plan adds two dedicated Aave V4 modules, or Spokes: one for stablecoin borrowing against locked Bitcoin and another focused on liquidations.
By avoiding wrapped Bitcoin, Babylon is trying to reduce dependence on bridges or outside custodians. The initial community temperature check has passed, and the next step is deeper review from Aave governance, delegates, and risk providers as they assess whether this native Bitcoin structure fits the protocol.