The blockchain research and development firm Babylon Labs submitted a Temperature Check to Aave DAO on Monday, seeking approval to integrate Trustless Bitcoin Vaults with Aave V4 and onboard native $BTC as collateral without bridges, wrappers, or custodians.
Key Takeaways:
- Babylon Labs filed a May 25 Temp Check asking Aave DAO to accept native $BTC collateral via Trustless Bitcoin Vaults on Aave V4.
- The $BTC Vault Swap Spoke targets Aave’s $5B WBTC supply, currently underused on the borrow side, to drive new demand.
- If the Temperature Check passes, Babylon Labs advances to ARFC review, with audits by Coinspect, Sherlock, and Zellic ongoing.
$BTC Holders Could Borrow on Aave V4 Without Bridges if Babylon Labs Vote Passes
The proposal calls for deploying two new Aave V4 Spokes on Ethereum Mainnet. The first, the Babylon Core Lending Spoke, lets $BTC holders borrow supported assets such as stablecoins and wrapped $BTC against their native bitcoin collateral. The second, the $BTC Vault Swap Spoke, handles post- liquidation settlement by converting seized $BTC collateral into WBTC for permissionless liquidators.
The mechanism works through Taproot scripts on Bitcoin. A depositor locks $BTC onchain inside a Taproot unspent transaction output ( UTXO). That lock creates a corresponding vault record on Ethereum.
Because Aave V4 only accepts ERC-20 tokens as collateral, adapter contracts represent each vault record one-to-one as a transfer-restricted token called vaultBTC. The token can only move between the Aave V4 Hub, the Babylon Core Spoke, and the integration’s adapter contract. No other transfers are permitted.
Babylon Labs co-founded the project in 2022 with Professor David Tse of Stanford and Dr. Fisher Yu. Since its bitcoin ( $BTC) staking protocol launched in August 2024, it has activated more than 100,000 $BTC cumulatively and currently holds approximately 51,000 $BTC, valued near $4 billion, in active stakes.
Investors backing the project include A16z, Paradigm, and Polychain, with total funding exceeding $100 million. The underlying cryptography driving Trustless Bitcoin Vaults comes from BaBe, a peer-reviewed paper co-developed by Babylon Labs and UC Berkeley, set to appear at CCS 2026, according to the Temp Check.
The research reduces the cost of SNARK proof verification on Bitcoin by roughly 1,000 times compared to prior approaches, making the fraud-proof challenge window economically viable at scale. When a user’s $BTC position is liquidated, a permissionless liquidator swaps the seized vault for WBTC at a small premium. A separate set of permissioned arbitrageurs then purchase those escrowed vaults, repay the WBTC debt, and redeem the underlying $BTC natively on Bitcoin.
The structure decouples liquidation timing from $BTC redemption, allowing liquidators to settle immediately while the $BTC-side process runs on its own timeline. The proposal also targets WBTC utilization on Aave. The platform currently holds roughly $5 billion in WBTC supply, which Babylon Labs described as underutilized on the borrow side.
Routing liquidation settlements through WBTC is designed to generate new borrowing demand for that asset. Aave DAO retains full control over all risk parameters, supply caps, borrow caps, and governance oversight across both Spokes. The Temperature Check focuses on integration architecture. Risk parameters, oracle configuration, and full trust-assumption details are expected in a follow-up Aave Request for Comment.
Security reviews are currently underway with Coinspect, Sherlock, Zellic, ABDK, and ZK Security across the protocol stack, as detailed by Babylon Labs. Formal verification is being conducted by Runtime Verification.
If the Temperature Check snapshot shows positive community sentiment, the proposal advances to the ARFC stage for further risk evaluation and audit review. A successful ARFC snapshot moves it to an onchain AIP vote for final governance approval.
Babylon Labs stated it was not compensated by any third party to publish the proposal.
Community Response Leans Positive
The integration, if approved, would give $BTC holders a direct path to decentralized finance ( DeFi) borrowing without handing custody to a bridge, signer consortium, or threshold-signature group. Other projects building $BTC-collateralized products could also layer on top of the primitive, extending the reach of native $BTC into broader DeFi activity.
Early community response to the governance thread has been broadly supportive. Aave Labs Technical Service Provider Simo noted the integration aligns with Aave V4’s Hub-and-Spoke design and that routing post- liquidation settlements through WBTC would generate meaningful borrow demand for an asset already heavily supplied on the platform.
Aave founder Stani Kulechov backed the Temperature Check directly, citing enthusiasm for the V4 Spoke ecosystem gaining real bitcoin collateral. Contributor Nicopei added an institutional angle, pointing out that keeping $BTC native while offering predictable borrowing costs addresses the two requirements most commonly cited by institutional borrowers who currently rely on off-chain solutions.
