By Layla Zulfa 
Bitcoin-focused developer Babylon Labs has officially submitted a formal proposal aimed at allowing users to borrow stablecoins on the decentralized finance lending giant Aave by utilizing native Bitcoin as collateral.
The development marks a significant step forward in bridging the gap between the Bitcoin network and the broader decentralized finance ecosystem. Under the operational mechanics outlined in the proposal, users would securely lock their native Bitcoin within specialized vaults operating directly on the Bitcoin network. Once the Bitcoin is secured in these native vaults, users would be empowered to borrow stablecoins against that locked value on the Aave protocol.
To bridge the operational divide between the two distinct blockchain networks, a non-transferable token issued on the Ethereum network would serve as the digital representation of the underlying collateral. Meanwhile, the actual Bitcoin itself would remain securely anchored on its native blockchain, entirely eliminating the need for traditional bridging or wrapping mechanisms that have historically introduced vulnerabilities into cross-chain transactions.
The Wednesday submission of the formal proposal follows an initial conceptual introduction shared by the development team on May 25. That early presentation was followed by a preliminary community temperature check vote that successfully passed on June 10, according to internal updates provided by Babylon Labs during their quarterly founders call.
As part of the economic framework embedded within the proposal, the Aave decentralized autonomous organization would stand to receive substantial financial incentives. Specifically, the Aave DAO would be slated to receive the first $500,000 in qualifying annual revenue generated directly by the integration of the Babylon vaults. This revenue-sharing model is designed to align the interests of both protocols while providing immediate economic value to the Aave ecosystem and its token holders.
The initiative addresses a long-standing architectural limitation within decentralized finance. Currently, Aave already supports loans against tokenized forms of Bitcoin through various derivative assets, most notably Wrapped Bitcoin and Coinbase Wrapped Bitcoin. However, these established wrapped tokens inherently rely on centralized or semi-centralized custodians to hold and secure the underlying physical Bitcoin. This reliance on external custodians introduces counterparty risks, potential regulatory vulnerabilities, and single points of failure that many purists and security-conscious market participants prefer to avoid.
As of Thursday, the newly submitted proposal remains actively positioned at the Aave Request for Comment stage. During this crucial phase, the initiative is undergoing rigorous community feedback collection, technical evaluations, and comprehensive risk analyses conducted by risk management entities and community contributors associated with the Aave protocol.
Should the proposal successfully navigate the community feedback loop and achieve a broad consensus among stakeholders, it will be cleared to advance to the next formal phase of governance. This subsequent step involves a mandatory three-day offchain Snapshot vote. According to Aave’s established governance rules and operational guidelines, this offchain phase requires a minimum threshold of at least 320,000 AAVE-equivalent votes cast in favor of the initiative before it can successfully progress to a formal onchain vote.
Once through the offchain hurdle, the proposal would face the ultimate onchain vote, which must strictly meet all pre-established quorum requirements and approval thresholds mandated by Aave governance protocols to be officially ratified and implemented.
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Jia Lissa