By Asep Darmawan 
Bitcoin-focused developer Babylon Labs has officially submitted a formal governance proposal to allow users to borrow stablecoins directly on the decentralized lending protocol Aave by using native Bitcoin as collateral.
Under the technical framework outlined in the proposal, users would lock their native Bitcoin assets securely within vaults situated directly on the Bitcoin network. They would then be able to borrow against this locked capital on Aave. To bridge the gap between the two distinct blockchain ecosystems, a non-transferable token minted on the Ethereum network would serve as a representation of the underlying collateral. Crucially, the actual Bitcoin would remain securely on its native blockchain network throughout the process, eliminating the traditional requirement for assets to be bridged, wrapped, or transferred to a third-party chain.
This recent Wednesday proposal represents the latest milestone in a broader governance journey that began months earlier. It follows an initial submission posted to the Aave governance forums on May 25, which subsequently advanced to a preliminary community temperature check vote that successfully passed on June 10, according to public disclosures from Babylon Labs during their quarterly founders call.
As part of the economic terms outlined in the proposal, the Aave decentralized autonomous organization would stand to benefit directly from the integration. Specifically, Aave DAO would receive the first $500,000 in qualifying annual revenue generated by the native Bitcoin vault integration, aligning the incentives of both protocols and providing a substantial financial boost to the Aave ecosystem.
The introduction of native Bitcoin collateral represents a significant potential shift in how decentralized finance protocols handle Bitcoin liquidity. Currently, Aave already supports loans against tokenized forms of Bitcoin through assets such as Wrapped Bitcoin and Coinbase Wrapped Bitcoin. However, these wrapped and tokenized alternatives inherently rely on centralized or federated custodians to hold and secure the actual underlying Bitcoin on behalf of token holders. This custodial arrangement introduces underlying counterparty risks, as users must trust the custodian to maintain proper reserves and honor redemption requests. By leveraging Babylon’s vault technology, the proposed integration seeks to mitigate these traditional trust assumptions by keeping the core asset on the Bitcoin blockchain.
As of Thursday, the proposal is officially navigating the rigorous evaluation process established by the Aave community. It currently sits at the Aave Request for Comment stage, a vital phase where the protocol’s risk managers, developers, and community members thoroughly review the technical specifications, potential economic implications, and security considerations.
Should the proposal successfully achieve broader community consensus during the ARFC stage, it will be eligible to proceed to subsequent governance hurdles. According to Aave’s established governance rules, this progression includes a mandatory three-day offchain Snapshot vote. For the proposal to clear this particular hurdle and advance further, it must secure at least 320,000 AAVE-equivalent votes in favor from participating token holders.
Following a successful offchain Snapshot vote, the initiative would then need to transition to a formal onchain vote. This final governance stage must strictly meet all designated quorum requirements and approval thresholds mandated by Aave’s smart contract governance framework before any code changes or protocol integrations can be officially implemented and deployed.
Jia Lissa 
Layla Zulfa