Aave passes native Bitcoin lending proposal, but hidden liquidation risks remain
Quick Take
- Babylon reports Aave's Nov. 9 ARFC vote passed, advancing native Bitcoin collateral while final on-chain approval remains pending.
- Proposed Core Hub stablecoin credit lines total $21 million, with separate Babylon Hub limits and a 78% collateral factor.
- Restricted rollout remains ahead, while native Bitcoin borrowers would still face liquidation risk and WBTC settlement dependencies.
Aave's proposal to let holders borrow stablecoins against native Bitcoin cleared its preliminary ARFC governance vote on Nov. 9, according to Babylon Labs.
The borrowing market still needs final approval before holders can use it on mainnet. Babylon reported 100% support for the plan to connect its Trustless Bitcoin Vaults to Aave V4, and the next step is an Aave Improvement Proposal (AIP) for final on-chain approval.
A vote advances the plan. Borrowing still awaits approval.
Babylon reports ARFC passage on Nov. 9. Final AIP approval and a restricted mainnet rollout remain ahead.
Explore the proposed market
BTC stays locked on Bitcoin; Aave recognizes collateral on Ethereum and lends supported stablecoins.
Native BTC would back stablecoin loans, while WBTC still has a separate liquidation-settlement role.
Vote result attributed to Babylon. Late-2026 target remains conditional. Credit limits are proposed capacity. Diagrams omit operator and governance detail; liquidation risk and WBTC dependencies remain.
Sources
Supporting facts
- Reported statement Babylon reports that the ARFC vote to enable native Bitcoin collateral on Aave V4 passed on November 9, 2026, with 100% of votes in favor. [1]
- Reported statement Babylon says final AIP approval is the next step before Ethereum mainnet deployment; the ARFC passage does not itself open borrowing access. [1] [2]
- Reported statement Babylon targets late 2026 for mainnet subject to change and confirmation, beginning with limits on participants and volume; it says a schedule and staged rollout plan will follow. [1]
- The proposed Core Hub stablecoin credit lines are $8 million each for USDT and USDC, $1 million for GHO, and $2 million each for USDG and RLUSD; Babylon describes the combined initial capacity as $21 million. [2] [1]
- The design locks the underlying BTC on Bitcoin and uses a transfer-restricted ERC-20 collateral accounting record on Ethereum, rather than requiring the depositor to supply a freely transferable wrapped Bitcoin token. [2] [3]
- Permissionless liquidation settlement uses WBTC at launch, borrowed from an Aave Hub through BTCVaultSwap, while permissioned arbitrageurs later repay the debt and redeem BTC over several days. [2] [3]
Method
Reported governance stages are arranged in sequence, without duration or probability scaling. Selectable diagrams explain two different proposed mechanisms; no forecast or live-liquidity calculation is shown.
Scope
Vote result attributed to Babylon. Late-2026 target remains conditional. Credit limits are proposed capacity. Diagrams omit operator and governance detail; liquidation risk and WBTC dependencies remain.
CryptoSlateUnder the proposed change, BTC would remain locked on Bitcoin, while an Ethereum-based accounting record would let Aave recognize it. Borrowers would not need to supply a freely transferable wrapped Bitcoin token.
The governance proposal sets out initial stablecoin credit lines from Aave's Core Hub liquidity pool of $8 million each for USDT and USDC, $1 million for GHO, and $2 million each for USDG and RLUSD.
A separate liquidity pool, the Babylon Hub, would let liquidity providers choose exposure to native Bitcoin collateral, with its own limits.
Risk adviser LlamaRisk recommends a 78% collateral factor for native BTC. The collateral record itself would remain non-borrowable, representing BTC securing a position.
Babylon targets mainnet for late 2026, subject to change and confirmation. It says deployment will start with restrictions on participants and volume, with a schedule and staged rollout plan still to follow. Its current FAQ directs users to a public testnet and gives a fourth-quarter mainnet target.
Keeping the underlying BTC on Bitcoin does not remove liquidation or settlement risk. The Ethereum collateral record would be a transfer-restricted ERC-20 accounting unit, and a borrower could still lose vault collateral through liquidation.
Wrapped Bitcoin remains as part of the structure
The design also retains a role for Wrapped Bitcoin (WBTC). Under the permissionless liquidation route, BTCVaultSwap would borrow WBTC from an Aave Hub to settle immediately with liquidators.
Permissioned arbitrageurs would later repay that debt and redeem the underlying BTC over several days, as LlamaRisk's assessment describes.
The proposed Core Hub draw cap for that settlement venue is 100 WBTC, separate from the stablecoin lending lines. Permissioned actors can also liquidate and redeem vaults directly without drawing Hub liquidity, although fees or borrower compensation can still require WBTC.
Liquidation seizes whole vaults, even when clearing the debt requires less than a vault's full BTC value, and the borrower receives discounted compensation for that remainder in wrapped BTC.
Prospective borrowers still need final AIP approval and a confirmed rollout schedule before this market moves from governance backing to mainnet access.
Mentioned in this article
Editorial credits
Also known as "Akiba," Liam Wright is a reporter, podcast producer, and Editor-in-Chief at CryptoSlate. He believes that decentralized technology has the potential to make…
Gino Matos is a law school graduate and a seasoned journalist with six years of experience in the crypto industry. His expertise primarily focuses on the Brazilian blockchain…