Can You Borrow USDC with Native BTC? Inside the Aave DAO & Babylon Proposal

The digital asset lending landscape is experiencing a major structural shift. The Aave DAO recently passed a historic proposal with Babylon to allow users to borrow stablecoins using native Bitcoin. 

This development answers the long standing question of whether you can borrow stablecoins using native Bitcoin without relying on wrapped tokens, bridges, or third party custodians. 

By utilizing Babylon Trustless Bitcoin Vaults, users can now access liquidity while maintaining complete control over their private keys.

Key Takeaways

• Aave DAO approved the integration of native Bitcoin as collateral through a unanimous vote.
• Users can borrow stablecoins while their Bitcoin remains securely locked on the Bitcoin network.
• The initial borrowing capacity is capped at roughly $21 million with an aggressive scaling plan.

The Aave DAO and Babylon Governance Proposal Passes

On November 9, the Aave DAO Babylon governance proposal passed with 100% approval. The initiative outlines a framework to integrate native Bitcoin into Aave V4 as collateral. 

Following this approval, the proposal now advances to the final execution stage known as the Aave Improvement Proposal. The mainnet launch is targeted for late 2026, with initial participation and scale strictly limited before a phased expansion. 

This milestone bridges the largest cryptocurrency by market capitalization directly into Ethereum's largest lending market.

Read also: AAVE Price Prediction: Can Bitcoin Collateral Fuel a Rally? Bitrue Insights

How Do Babylon Trustless Bitcoin Vaults Work in the Aave Ecosystem?

To understand how to use native Bitcoin as collateral on Aave, it is important to look at the underlying architecture. Borrowers lock their Bitcoin into a Taproot vault on the Bitcoin blockchain. 

This script based vault ensures the coins remain in the users own addresses, entirely eliminating bridge risk.

A non transferable ledger token matching the quantity of locked Bitcoin is then minted on Ethereum. This token serves as collateral proof within Aave V4. 

Because the actual Bitcoin never leaves the Bitcoin chain, users maintain self custody of their private keys without exposing their assets to transfer risk. This architecture provides a secure alternative to relying on custodians for wrapped assets.

Loan Parameters and Initial Scaling Limits

The integration features highly competitive terms designed to attract liquidity. Native Bitcoin carries a loan to value ratio of 78% with a zero risk premium. 

Borrowing costs are projected between 3% and 5% annually, significantly lower than the 9% to 16% range often seen on centralized platforms.

Initial scaling is cautious to ensure stability. Aave will grant an initial stablecoin credit limit of approximately $21 million. This includes $8 million each for USDC and USDT, along with smaller allocations for other stablecoins. 

The maximum collateral cap is initially set at 300 native Bitcoin. Future limit increases will require explicit approval from the Aave DAO.

Read also: Standard Chartered DeFi Report: 2030 Crypto Price Targets for UNI, AAVE, MORPHO & ARB

Revenue Sharing and Token Buyback Mechanics

The agreement introduces a tiered revenue distribution model. Only liquidity fees from borrower interest and liquidation fees qualify for sharing. Aave DAO retains the first $500,000 in annual revenue. 

For revenue between $500,000 and $2 million, Aave receives 78%, Babylon takes 18%, and 4% funds token buybacks.

If annual revenue exceeds $6 million, the split adjusts to 61.5% for Aave, 31.5% for Babylon, and 7% for buybacks. These funds will purchase tokens on the open market, allocating 85% to AAVE and 15% to BABY. 

While the buyback volume is relatively small compared to current market capitalizations, it establishes a direct value channel tied to borrower interest.

Read also: Aave Considers AAVE Token Burn: What It Means for Supply and Price

Liquidation Mechanics and Risk Controls

Because the collateral remains on a separate blockchain, liquidations require a specialized settlement module. Liquidators will use wrapped Bitcoin to purchase seized vaults, after which arbitrageurs redeem the native Bitcoin on the Bitcoin chain. 

Consequently, while the collateralization step removes custodial reliance, the liquidation process still requires wrapped assets.

Regarding risk management, emergency pauses are managed by a 3 of 5 multi signature wallet comprising representatives from Aave Labs, LlamaRisk, and Babylon. This group can halt repayments and liquidations without a timelock, but they hold no authority to transfer user funds.

FAQ

What is the main advantage of this setup?

Users can access stablecoin liquidity without selling their Bitcoin or trusting a centralized custodian to hold their funds.

What is the collateral ratio for native Bitcoin?

The proposal sets the loan to value ratio at 78%.

How are liquidations handled?

Liquidators use wrapped Bitcoin to purchase the seized vaults, which is then redeemed for the native Bitcoin backing the loan.

Disclaimer: The views expressed belong exclusively to the author and do not reflect the views of this platform. This platform and its affiliates disclaim any responsibility for the accuracy or suitability of the information provided. It is for informational purposes only and not intended as financial or investment advice.