By Jia Lissa 
Bitcoin-focused developer Babylon Labs has formally submitted a proposal to the decentralized finance community aiming to let cryptocurrency users borrow stablecoins on the Aave lending protocol using native Bitcoin as collateral.
The development marks a significant step forward in bridging the gap between the world’s largest cryptocurrency by market capitalization and the vast liquidity pools available within decentralized finance ecosystems, particularly on Ethereum and other networks supported by Aave. Under the hood of the newly proposed architecture, users would securely lock their Bitcoin holdings in dedicated vaults directly on the native Bitcoin network. They would then be able to borrow against this locked capital on Aave without having to relinquish direct custody of their original assets in the traditional manner.
To bridge the operational gap between the Bitcoin network and Aave’s smart contracts, a non-transferable token minted on the Ethereum blockchain would be utilized to represent the underlying collateral. Crucially, the actual Bitcoin itself would remain securely stored on its native blockchain network throughout the duration of the loan, completely avoiding the need for traditional bridging or wrapped token mechanisms that have historically introduced systemic vulnerabilities to decentralized finance protocols.
This latest governance proposal, submitted on a Wednesday, directly follows an initial community submission made by Babylon Labs on May 25. That early discussion led to a preliminary community vote that successfully passed on June 10, according to public updates and statements provided by Babylon Labs during their quarterly founders call.
As part of the economic framework outlined in the proposal, the Aave Decentralized Autonomous Organization would stand to benefit financially from the integration. Specifically, the Aave DAO would receive the first $500,000 in qualifying annual revenue generated by the native Bitcoin integration, providing a direct monetary incentive for the protocol to adopt the new infrastructure.
The introduction of native Bitcoin collateral represents a potential paradigm shift for Aave, which already supports loans against tokenized forms of Bitcoin through widely used assets such as Wrapped Bitcoin and Coinbase Wrapped Bitcoin. While these existing wrapped assets have successfully brought billions of dollars of Bitcoin liquidity into decentralized finance over the years, they inherently rely on centralized or federated custodians to hold and secure the underlying physical Bitcoin. This reliance introduces third-party counterparty risks, potential regulatory vulnerabilities, and single points of failure that many purists and risk-conscious investors within the cryptocurrency ecosystem prefer to avoid. By bypassing traditional wrapping and custody models in favor of trustless native vaults, the Babylon Labs proposal attempts to eliminate these intermediary risks.
As of Thursday, the proposal remains firmly situated at the Aave Request for Comment stage, where it is undergoing rigorous community feedback, public debate, and comprehensive risk analysis from various stakeholders, risk managers, and delegates within the Aave ecosystem.
Should the proposal manage to build a strong and sustained community consensus, it will be permitted to proceed to the next phase of governance: a mandatory three-day offchain Snapshot vote. According to Aave’s established governance rules and documentation, this offchain phase requires at least 320,000 AAVE-equivalent votes to be cast in favor of the initiative before it can officially advance to a formal onchain vote. Once it reaches the final stage, the onchain vote must successfully meet strict quorum thresholds and approval requirements to be fully enacted and integrated into the protocol’s codebase.
Layla Zulfa 
Ali Ikhwan