By Siti Muinah 
Bitcoin-focused development firm Babylon Labs has officially submitted a formal governance proposal designed to allow decentralized finance users to borrow stablecoins on the Aave lending protocol using native Bitcoin as collateral. The initiative marks a significant step forward in bridging the world’s largest cryptocurrency by market capitalization with the expansive liquidity and borrowing capabilities of the decentralized finance ecosystem, all without requiring users to relinquish custody of their primary assets to centralized entities or third-party bridges.
Under the mechanics outlined in the proposal, users would lock their native Bitcoin directly into dedicated vaults secured on the Bitcoin network. Once the Bitcoin is secured in these native vaults, participants would be able to borrow stablecoins against that locked collateral on Aave. To facilitate this cross-chain utility without moving the actual asset, a non-transferable token minted on the Ethereum blockchain would be issued to represent the collateral position. Meanwhile, the underlying Bitcoin itself would remain safely locked on its native blockchain, completely eliminating the need for traditional bridging mechanisms or wrapped asset wrappers that have historically served as prime targets for exploits and hacks across the broader blockchain industry.
This latest Wednesday proposal represents the natural continuation of a governance journey that began months prior. According to information shared by Babylon Labs, the initiative follows an initial submission made on May 25, which laid out the theoretical framework for the integration. Following that initial introduction, the concept underwent a preliminary community sentiment check and a preliminary community vote that officially passed on June 10, signaling strong early interest from the decentralized autonomous organization and laying the groundwork for the more technical proposal that has now been submitted for formal consideration.
As part of the economic terms structured within the proposal, the Aave decentralized autonomous organization would stand to capture direct financial benefits from the integration. Specifically, the Aave DAO would receive the first $500,000 in qualifying annual revenue generated by the Babylon integration, providing an immediate financial incentive for the protocol to adopt the new vault technology alongside the broader technological expansion of its collateral base.
The introduction of native Bitcoin collateral addresses a long-standing architectural vulnerability within decentralized lending markets. Currently, Aave and various other decentralized finance protocols already support loans against tokenized forms of Bitcoin, relying heavily on synthetic assets such as Wrapped Bitcoin and Coinbase Wrapped Bitcoin. While these wrapped assets have successfully unlocked billions of dollars in utility for Bitcoin holders within Ethereum and multi-chain environments, they inherently rely on centralized custodians to hold and secure the underlying physical Bitcoin. This reliance on intermediaries introduces critical counterparty risks, including regulatory uncertainties, potential custodian insolvency, and operational vulnerabilities that can compromise the safety of user funds. By bypassing the need for third-party custodians through native vaults, the Babylon Labs proposal seeks to offer a trust-minimized alternative that preserves the sovereign and decentralized nature of Bitcoin while integrating it smoothly into advanced lending architectures.
As of Thursday, the proposal remains actively situated at the Aave Request for Comment stage. During this critical phase of the governance lifecycle, the initiative is undergoing rigorous community feedback, public debate, and comprehensive risk analysis by decentralized finance risk contributors and community members alike. This evaluation period is designed to ensure that the protocol’s security parameters, liquidation mechanics, and economic assumptions are thoroughly scrutinized before any code is deployed or smart contracts are integrated into active market versions.
Should the proposal successfully navigate the risk analysis phase and achieve a robust community consensus, it will be cleared to proceed to the next critical checkpoint in Aave’s structured governance pipeline. According to Aave’s established governance rules, this would involve a three-day offchain Snapshot vote. For the proposal to clear the Snapshot stage and advance further, it must achieve a minimum threshold of at least 320,000 AAVE-equivalent votes cast in favor of the integration. Only after successfully meeting these offchain voting parameters can the initiative transition into a formal onchain vote, which represents the final legislative hurdle within the DAO.
Ultimately, that formal onchain vote must strictly satisfy both the necessary quorum thresholds and the specific approval requirements mandated by Aave’s decentralized governance framework before developers and risk managers can move forward with integrating native Bitcoin vaults into the protocol’s operating environment.
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Jia Lissa 
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