Aave V4 to Bring Native Bitcoin Collateral Through Babylon’s Trustless Vaults

TLDR:

• Native Bitcoin enters Aave lending through Babylon vaults with no wrapping and no centralized custody.
• Testing for the Bitcoin Spoke begins in Q1 2026 with a targeted April rollout pending governance.
• BTC-backed lending passed one billion dollars this year based on Babylon’s reported figures.
• Babylon’s trustless systems already activate billions in BTC, expanding Bitcoin’s productive use cases.
  

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Bitcoin is set to enter decentralized lending markets in a new way as Aave and Babylon outline a plan for native BTC collateral. The collaboration introduces trustless Bitcoin vaults to Aave V4, removing the need for custodians or wrapped assets. 

It marks a structural shift for onchain credit markets as institutional BTC lending demand expands. Early testing begins in Q1 2026 before Aave governance reviews the rollout.

Native Bitcoin Collateral Comes to Aave V4

Aave V4 uses a modular Hub and Spoke model that supports dedicated collateral markets. Babylon plans to build a Bitcoin-focused Spoke that allows users to supply native BTC directly into Aave. 

The company shared on social media that no wrapping or custody layers are involved, with Bitcoin remaining on its base chain. Aave will verify collateral positions through cryptographic proofs rather than external custodians.

The model runs on Babylon’s Bitcoin Vault, which locks BTC on the Bitcoin network and produces collateral data recognized inside Aave. 

Babylon’s blog explains that the design bypasses long-standing trust barriers that have slowed Bitcoin’s use in DeFi lending. This structure targets high-volume activity and aims to scale lending without intermediaries. It also brings Bitcoin’s settlement guarantees into Aave’s risk framework.

Institutional lending in 2025 has already grown, according to Babylon’s figures. The team notes that more than one billion dollars in BTC-backed loans were issued this year. 

Most activity still comes through centralized venues or wrapped assets, limiting access to non-custodial markets. The integration seeks to shift that balance by supporting direct Bitcoin collateral.

Development Timeline and Market Impact

Babylon and Aave Labs will collaborate on architecture decisions and risk evaluation. 

The teams plan to begin testing the BTC Spoke in early 2026, according to Babylon’s announcement. Governance approval will determine the final launch, with April 2026 targeted for activation. The companies intend to build a scalable path for Bitcoin holders to borrow assets while retaining onchain control.

Babylon says more than six billion dollars in native BTC is already active through its trustless staking system. 

Vault support brings that model to the wider market, touching Bitcoin’s multi-trillion-dollar liquidity pool. Institutions that work with large collateral positions gain a non-custodial option for lending strategies. Babylon frames this as a step toward positioning Bitcoin as a settlement layer for multi-chain finance.

Aave’s social posts emphasize how V4’s architecture enables new markets to launch cleanly. The partnership shows how modular structures can support new collateral types without wrapped conversions. 

It also reflects growing interest from borrowers seeking BTC-backed credit without leaving the Bitcoin base layer. The teams expect lending volume to increase as these mechanisms mature.

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