Babylon Labs has submitted a temperature check proposal to the Aave community, suggesting the integration of native Bitcoin as collateral through the Babylon Trustless Bitcoin Vaults protocol on Aave V4. According to ChainCatcher, the proposal aims to allow users to lock Bitcoin in Taproot UTXO without the need for wrapping, cross-chain bridges, or custodians. Redemption is controlled by on-chain rules, such as loan repayment, and directly settles to Bitcoin UTXO.
The proposal includes deploying two Aave V4 Spokes: Babylon Core Lending Spoke for lending and BTC Vault Swap Spoke for post-liquidation settlement. Collateral will be in the form of vaultBTC, a transfer-restricted ERC-20 token that can only be transferred between fixed whitelisted addresses. During liquidation, liquidators can immediately settle with WBTC, while arbitrageurs will handle Bitcoin redemption later.