TL;DR:
The ARFC proposal introduces native Bitcoin as collateral on Aave V4 through Babylon’s Trustless Bitcoin Vaults (TBV) protocol.
The architecture features two dedicated modules: the Babylon Spoke for stablecoin borrowing and the BTC Vault Swap Spoke for liquidations.
The revenue model directs 100% of the first $500,000 in annual qualified revenue exclusively to Aave DAO.
A formal Aave Request for Comments (ARFC) proposal published on Aave’s governance forums outlines the integration of trustless Bitcoin collateral into the Aave V4 architecture. Developed in collaboration with Babylon Labs , the initiative aims to enable depositors to lock native BTC to back loans in assets such as stablecoins.
Today, we published an ARFC on the @aave governance forum to propose native Bitcoin to Aave V4 as collateral through Babylon Trustless Bitcoin Vaults (TBV).
The proposal includes two new Aave V4 Spokes; Babylon Spoke and BTCVault Swap Spoke for borrowing and liquidation… pic.twitter.com/UYmWYcIwYi
— Babylon (@babylonlabs_io) October 14, 2026
Protocol data indicates that the system utilizes Trustless Bitcoin Vaults (TBV) technology, where capital remains secured directly within unspent transaction outputs (UTXOs) under Taproot scripts on the Bitcoin network.
Unlike conventional centralized custody models or federated bridges, the underlying asset never leaves the base chain and does not rely on multisig committees. Protocol records state that Babylon has built an operational track record starting with its staking system in August 2024, accumulating over 1 00,000 BTC in total and currently holding approximately 40,772 BTC under management (valued at around $3.37 billion).
The technical implementation on Ethereum does not issue a tradable synthetic token to represent the funds. According to developers, the integration uses an ERC-20 contract with strictly restricted transfers that operates solely as a 1:1 internal accounting unit, accessible exclusively by the central Hub and Aave V4 adapter contracts.
Modular architecture and liquidation mechanism
The proposal divides operations into two modular extensions or Spokes within the Aave V4 framework:
Babylon Spoke: Acts as the primary market where native BTC is the sole accepted collateral asset, enabling borrowing liquidity from the Aave V4 Hub.
BTC Vault Swap Spoke: Manages the resolution and liquidation of undercollateralized positions without imposing prolonged wait times on the Bitcoin mainnet.
Conventional liquidations in DeFi typically demand immediate execution, whereas unlocking scripts on Bitcoin involves multi-day challenge windows verified through zero-knowledge (ZK) proofs. To bridge this latency gap, the technical design specifies that permissionless liquidators receive Wrapped BTC (initially WBTC) borrowed as debt from the Aave Hub, while a designated pool of arbitragers subsequently assumes vault buybacks and redemptions on the Bitcoin blockchain.
The text of the proposal argues that this mechanism will drive sustained borrowing demand for existing WBTC pools on Aave—a market that currently experiences low utilization on the borrowing side.
Cross-chain cryptographic verification is powered by the BaBe protocol, a joint research development between Babylon Labs and UC Berkeley. According to the technical paper registered under reference eprint 2026/065, this optimization cuts SNARK proof verification costs on the Bitcoin network by approximately 1,000 times compared to prior approaches.
Regarding economic distribution, the framework proposes tiered revenue-sharing brackets for qualified income between Aave DAO and the Babylon Foundation. 100% of the first $500,000 generated annually will be allocated to Aave DAO, after which tiered percentages will apply, including allocations for open-market purchases of AAVE (85%) and BABY (15%) tokens.
The security framework reported completed audits by six independent security firms, including formal smart contract verification conducted by Runtime Verification. The technical roadmap schedules the publication of final re-audits conducted by Coinspect, ABDK, and Zellic prior to the binding governance vote and mainnet deployment.
