Babylon's Trustless Vaults will add native Bitcoin collateralized lending through Aave.

Although the BTC-backed lending market has grown to a scale of billions of dollars, most of the activity still relies on custodial models. Against the backdrop of decentralized finance (DeFi) long depending on wrapped Bitcoin (WBTC) and custodial intermediaries, the collaboration between Bitcoin staking project Babylon and Aave is bringing a breakthrough development to DeFi: native Bitcoin (native BTC) can be used directly as lending collateral. This integration will be supported by Babylon’s Trustless Vaults and officially launched with Aave’s upcoming V4 version, marking the first time DeFi can connect to true Bitcoin liquidity on a large scale.

Moving Away from Wrapped Assets: Aave to Support Native Bitcoin Collateral

Previously, BTC’s entry into the DeFi market was extremely limited, mainly relying on tokenized forms such as WBTC and renBTC. However, these wrapping mechanisms typically require centralized custody, creating single points of failure and limiting the depth and breadth of real Bitcoin users’ participation in DeFi. With Babylon’s Trustless Vaults, Aave V4 will for the first time allow users to deposit real Bitcoin and borrow stablecoins or other assets against it. Users do not need to convert BTC to WBTC or rely on any custodial intermediaries, reducing trust costs and enhancing security. This move will allow Aave to tap into a much larger BTC liquidity pool and redefine the market scale. Babylon co-founder David Tse pointed out that even if only 5% of the Bitcoin supply enters lending protocols, it would far exceed the amount of BTC currently available in DeFi.

Strong Demand for Bitcoin Staking: Over 56,000 BTC Locked

Babylon’s Bitcoin staking product has already securely stored over 56,000 BTC, valued at more than $5.15 billion. This not only demonstrates strong market demand for BTC ecosystem applications but also highlights the general trend of Bitcoin holders seeking to earn yield while holding coins. Tse stated that lending is the most natural and in-demand application scenario for activating Bitcoin’s value. The collaboration between Babylon and Aave will open a new chapter in the native BTC lending market, transforming Bitcoin from a “passive asset” into one that can truly participate in efficient capital flows.

Aave’s Hub-and-Spoke Architecture: BTC Vaults Become New Liquidity Nodes

The technical key to this collaboration lies in Aave’s hub-and-spoke architecture. Babylon will set up a dedicated Bitcoin spoke node in Aave’s central liquidity hub and connect to the Bitcoin mainnet through its Trustless Vaults, allowing users to deposit real BTC on Babylon’s base chain. After depositing, users can borrow various assets on Aave’s market, achieving a cross-chain collaboration model where BTC is custody on the Bitcoin chain and assets are borrowed in DeFi protocols. This means native BTC can participate in multi-chain DeFi trustlessly, reducing cross-chain bridge risks and making the Bitcoin lending market more efficient and transparent.

Expanding the DeFi Landscape: Babylon Plans to Launch BTC-Backed Decentralized Insurance

In addition to lending, Babylon is extending its vault logic to the DeFi insurance sector by launching a BTC-backed decentralized insurance product. The product is designed to use BTC as collateral to support protocol-level risk protection. If a protocol suffers a hack or exploit, the insurance system can immediately pay out compensation from the BTC pool; under normal circumstances, users’ BTC can generate yield, making Bitcoin an “insurance premium liquidity provider.” Tse revealed in an interview with CoinDesk that the insurance plan is still under development and is scheduled for official launch in January 2026.

The Huge Potential to Reshape the BTC Lending Market

Currently, the BTC lending market, worth billions of dollars, still heavily relies on centralized custody, and the market cap of wrapped BTC accounts for less than 1% of the total value of Bitcoin. For DeFi protocols seeking deeper liquidity, this has long been a bottleneck. Tse pointed out that if native BTC can truly be unlocked, the ceiling for the DeFi lending market will be greatly raised. The native integration of Bitcoin into DeFi will no longer be just a vision but an imminent reality.

2026 Test Plan Launch, Product Expected in April

The integration of Babylon and Aave is expected to enter the testing phase in early 2026, with the market version officially launching in April. This timeline means the DeFi ecosystem will see a major upgrade within two years, and the way Bitcoin is used will undergo significant changes. If the plan is successfully implemented, Aave will become one of the first mainstream DeFi protocols to support native BTC collateral.

This article “Babylon’s Trustless Vaults Will Bring Native Bitcoin Collateralized Lending to Aave” first appeared on ABMedia.