TL;DR
- Babylon partners with Aave to allow BTC to be used directly as collateral without wrapping.
- Unlocking native BTC could inject an “enormous” amount of liquidity into lending protocols.
- The product will be based on Babylon’s “trustless vaults” architecture and is set to begin testing in 2026.
Babylon, the Bitcoin staking project, has teamed up with Aave, the largest decentralized lending protocol, and together they seek to revolutionize decentralized finance (DeFi). This partnership aims to allow the leading crypto to be used as collateral on Aave’s platforms, eliminating the reliance on centralized custody.
The initiative, based on Babylon’s “trustless vaults,” could be a game-changer for the asset’s utility.
Although the Bitcoin-backed lending sector already moves billions of dollars, much of this activity relies on custodial models. Even Wrapped Bitcoin (WBTC), the largest of these tokens, constitutes far less than 1% of the total market capitalization of the pioneering crypto.
This limitation poses a key obstacle for DeFi protocols craving deeper liquidity. Babylon co-founder David Tse pointed out that unlocking native BTC could radically reshape lending markets, indicating that even 5% of Bitcoin’s supply entering lending protocols would be an “enormous” injection of liquidity compared to what is available today.
Trustless Vaults and the Future of Native Bitcoin Lending in DeFi
The alliance seeks to combine Babylon’s “trustless vaults,” which allow native Bitcoin to be put to work in the ecosystem, with Aave’s hub and spoke architecture. Babylon will build a dedicated Bitcoin-backed “spoke” within Aave’s lending “hub.” This mechanism will allow users to deposit real BTC on its base chain and, simultaneously, borrow stablecoins and other assets on Aave’s markets.
This solution responds to a clear market demand: Babylon’s staking product already secures over 56,000 BTC ($5.15 billion), which demonstrates an appetite for using BTC productively without selling it. Testing will begin early next year, and the launch is scheduled for April or May.
In summary, in addition to native Bitcoin lending in DeFi, Babylon plans to extend its vault design to decentralized insurance (DeFi insurance). This would allow BTC to be used as collateral for coverage against protocol hacks. The deposited BTC would earn yield if no payouts occur, while providing liquidity for claims.
