Aave Vote Advances Native Bitcoin Loans on V4

Aave V4 outlines $21 million in stablecoin credit

The risk recommendations on Aave’s forum lay out $8 million each in USDC and USDT credit from Aave’s Core Hub, plus $5 million combined in GHO, USDG and RLUSD. A separate 100 WBTC line would support liquidations. These figures describe proposed limits on what the lending and liquidation modules can draw from the shared pool.

The plan sets a 78% collateral factor, which determines how much of the Bitcoin’s value Aave counts toward backing a loan. Babylon said it expects no additional interest charge tied to the collateral’s risk rating. Borrowers would still pay interest on the assets they draw, and Aave’s standard rates can move as liquidity is used.

A separate Babylon pool would let lenders opt into exposure specifically to this native Bitcoin market. For that pool, LlamaRisk recommended a 300 BTC collateral cap and initial limits of $5 million each for USDC and USDT. The Core Hub would provide most of the initial lending liquidity under the proposed configuration.

Babylon locks Bitcoin while Aave tracks the loan

A borrower would lock BTC in a Babylon vault on Bitcoin. Ethereum contracts would then create a record for use inside Aave. The record cannot be traded like a wrapped token, and the underlying Bitcoin stays on its own network while it backs the loan.

The vault has a fallback if it never opens. Under the proposal, if the borrower fails to activate the vault or a required participant fails to sign, the request expires. The borrower can reclaim the BTC after a waiting period.

That differs from the Bitcoin loan markets Ledger opened with Morpho, where borrowers pledge wrapped versions of BTC on Ethereum. Babylon’s design removes the wrapping step for the borrower’s deposit. Wrapped Bitcoin still has a role if the position is liquidated.

If the value of the collateral falls too far relative to the debt, the system can seize a whole vault. LlamaRisk’s assessment says the proposed swap module lets liquidators receive WBTC promptly on Ethereum. Authorized traders can then take over the vault and redeem the underlying BTC, a process that takes several days.

The assessment describes a challenge window of about four days for claims on Bitcoin. That delay also applies to ordinary withdrawals. A borrower who wants to free up part of a position can withdraw whole vaults as long as the remaining collateral still supports the outstanding debt.

Aave and Babylon set terms for fees and rollout

The proposal’s revenue schedule gives Aave DAO the first $500,000 in qualifying fees in each 12-month period after launch. Above that amount, Aave and Babylon share the proceeds and allocate a portion to token purchases. The formula applies to specified protocol fees from lending and liquidations.

Between $500,000 and $2 million, 4% of qualifying fees in that band would go to token purchases. The share rises to 7% for fees above $6 million. Of the money earmarked for purchases, 85% would go toward AAVE and 15% toward Babylon’s BABY token.

Aave Labs said users would initially be able to view their positions in Aave Pro. Opening and managing loans would take place in Babylon’s interface, which Aave Pro would link to. Babylon began public testing in June after an earlier private trial.

The Crypto Fear & Greed Index rose to 32 on Tuesday from 29 on Monday, remaining in the Fear range.

Babylon says it will publish an opening schedule and start with limits on participation and volume. The next milestone is the on-chain proposal, which is expected to set out the final risk parameters. An opening date and eligibility details have yet to be announced.