Aave (AAVE) 13 percent below its weekly high, Babylon applies for native Bitcoin as collateral in V4: what matters now

Babylon Labs wants Aave V4 to accept real Bitcoin as collateral without that Bitcoin ever leaving the Bitcoin blockchain. The proposal has been in Aave's governance forum since Wednesday, October 14, 2026. Nothing has been decided: this is an ARFC, the stage before the vote. Holders of Aave therefore get a concrete template for the first time showing how much the protocol would earn from Bitcoin collateral.

What Babylon has proposed for Aave V4

The proposal is titled “Onboard Native BTC as Collateral to Aave V4 via Babylon Trustless Bitcoin Vaults” and was filed by Babylon Labs. It was preceded by a temperature check, which the proposal passed. The first use case is named clearly: borrowing stablecoins against native Bitcoin.

At Aave an ARFC is not a decision but a proposal with a rationale and a blueprint. It gathers feedback from the community and the assessment of the risk service providers before any vote takes place. The sequence is set at Aave, and it appears in this proposal too: first feedback and risk analysis, then a Snapshot vote, then an AIP with the full risk parameters for the on-chain vote.

ARFC stands for Aave Request for Final Comments. It is the stage at which a proposal is technically described in full but has not yet received a single vote.

Aave price $148.30, 13 percent below last week's level

Aave costs $148.30, or €132.39, according to CoinGecko as of Thursday midday. Over seven days that is 13.16 percent less, over 24 hours 6.56 percent. The weekly high stood at $171.52 on Monday, the weekly low is $148.19 and therefore practically at the current price. The day's range ran from $147.94 to $158.98.

The 30-day view turns the picture around: there it shows a gain of 16.59 percent. The week was weak, then, the month was not. With a market capitalisation of $2.29 billion Aave sits at rank 46, on daily turnover of $269.4 million. From its high of $661.69 in May 2021 it is 77.59 percent short. In circulation are 15.44 million AAVE of the 16 million maximum that will ever exist.

Almost the entire crypto market fell this week, and Bitcoin gave up considerably less than Aave in the process. Babylon's proposal is therefore not a price driver that could be seen in the weekly numbers. It is news about the protocol's revenue, and that works through quarters, if at all.

Trustless Bitcoin Vaults: the Bitcoin stays where it is

The heart of the proposal is the custody question. The Bitcoin stays in a Taproot UTXO on the Bitcoin blockchain. It is not wrapped, not sent across a bridge and not held by a custodian. That is the difference from everything running as Bitcoin collateral in DeFi so far.

A Taproot UTXO is an unspent output of a Bitcoin transaction whose spending conditions are set through the Taproot format. Put simply: an amount of Bitcoin with a condition attached as to who may move it and under what circumstances.

On Ethereum a representation token is created for it under the ERC-20 standard with eight decimal places. It is minted when a vault is activated and burned when the position ends. It can only be transferred between the contracts of the integration itself, and the total amount always corresponds exactly to the Bitcoin tied up in active positions. The representation is therefore not a freely tradable token but an accounting entry.

Two new spokes in the hub-and-spoke architecture

Aave V4 is built on a hub-and-spoke pattern: a hub holds the liquidity, the spokes are the markets drawing on it. The proposal wants to set up two new spokes. The Babylon Spoke lists native Bitcoin as its only collateral. The BTC Vault Swap Spoke handles settlement after a liquidation. Both draw their liquidity from an Aave V4 hub; which hub instance that is, the proposal does not specify.

Four settings are already fixed and are not meant as adjustable levers. Native Bitcoin is collateral only and cannot be borrowed. The liquidation fee is set to zero. The option for liquidators to receive shares instead of collateral is switched off. And the target health factor, which otherwise determines how far a position is wound back in a liquidation, has been removed.

What happens to the Bitcoin in a liquidation

The most interesting part of the proposal is not in the figures but in how a liquidation runs, and it explains why the liquidation fee can be zero. Until now a liquidator at Aave takes part of the collateral and sells it on the market. Bitcoin on the Bitcoin blockchain cannot be realised that way, because the liquidator works on Ethereum.

The proposal solves this in three steps. First, a liquidation always seizes exactly one BTCVault, not a percentage of a position. Second, any liquidator may sell the seized vault to the BTC Vault Swap Spoke without permission and receives WBTC at the oracle price, less a discount. WBTC is the wrapped Bitcoin token the integration starts with. Third, arbitrageurs step in, repay the WBTC debt and redeem the real Bitcoin on the Bitcoin blockchain in return.

The discount on the sale is thus the liquidator's actual compensation, and it replaces the liquidation fee. Three values at the swap spoke are adjustable: this sale discount, a minimum reserve for the arbitrageurs' profit and the recipient of the fees. The proposal gives figures for none of these three.

To see how collateralised loans differ across platforms, the terms sit side by side in our crypto lending comparison. The mechanics of liquidation are the point where providers differ most.

The revenue split: the first $500,000 goes entirely to the Aave DAO

Here the proposal becomes unusually precise, and here lies the actual substance for AAVE holders. Two income streams count as qualifying revenue: the hub liquidity fee on the interest that borrowers pay in the Babylon Spoke, and the liquidation fees arising through the adapter and the BTC Vault Swap Spoke.

The first $500,000 of that income per year goes entirely to the Aave DAO. Above that a tiered split applies, divided in each case between the DAO, Babylon and token buybacks:

• $500,000 to $2 million: 78 percent DAO, 18 percent Babylon, 4 percent token buyback
• $2 million to $4 million: 72.5 percent DAO, 22.5 percent Babylon, 5 percent buyback
• $4 million to $6 million: 67 percent DAO, 27 percent Babylon, 6 percent buyback
• above $6 million: 61.5 percent DAO, 31.5 percent Babylon, 7 percent buyback

The buyback splits 85 percent into AAVE and 15 percent into BABY, Babylon's token. The repurchased tokens go in equal parts to the Aave DAO and the Babylon Foundation. Distribution is monthly. In addition, the adapter may charge a Babylon interest fee, a share of the base interest the borrower pays at Aave. How large that share is does not appear in the proposal.

The share flowing directly into AAVE buybacks is in single digits at every tier: 4 to 7 percent of qualifying revenue. Even at $6 million of annual income that would be around $420,000 for buybacks, 85 percent of it in AAVE. Against a market capitalisation of $2.29 billion that is a small number, and nobody should read it as a price driver.

Which risk parameters are still missing

The figures on which everything hangs for borrowers do not appear in the proposal. There is no loan-to-value ratio, no liquidation threshold and no supply cap. On this the proposal says in as many words that the risk parameters for both spokes would be supplied by Aave's risk service providers. That is the usual procedure at Aave, but it also means there is no basis today for estimating how much stablecoin a single Bitcoin would support.

Without a liquidation threshold, the risk of a margin call cannot be quantified either. For judging the proposal that is no shortcoming; for an investment decision it is.

The proposal does not stand alone in the forum

Aave's governance forum holds further proposals in the same week. On October 15 an ARFC arrived on onboarding USAT, the US dollar token from Tether America, into the V3 Core instance and the V4 Core hub on Ethereum. On October 14 a risk framework for tokenised equities on Aave V3 X Layer was put up for discussion, and on October 13 a CAPO SnapshotRatio adjustment via Aave V3.

The pattern is the same in every case: Aave is taking on collateral that has not sat in DeFi lending markets before. Native Bitcoin is the largest piece of that, because it concerns the largest amount of capital that has so far simply been sitting there.

Our assessment of the Babylon proposal

From this newsroom's point of view, the solid part of this proposal is the custody construction and the secondary part is the revenue split. The design speaks for it: the Bitcoin stays in the Taproot UTXO, the representation on Ethereum is non-transferable and equal in amount to the Bitcoin tied up, and a liquidation seizes a whole vault rather than a share. These three points are set out in the proposal and are not statements of intent.

Against it speaks the stage of the process. The loan-to-value ratio, liquidation threshold and supply cap are missing, as are the values for the sale discount and the Babylon interest fee. Until the Snapshot vote and the AIP that follows it, whether and with what limits this starts remains open. The income from the tiers weighs too little against $2.29 billion of market capitalisation to move a price. Buying AAVE for the buybacks means counting on single-digit percentage shares of revenue that does not yet exist. A total loss remains possible in any crypto investment.

The proposal is public and readable without an account

The proposal is public and readable without an account. It sits in Aave's governance forum, and Babylon describes its Trustless Bitcoin Vaults on its own site. For context, three points are worth a look: the list of fixed settings, the tiers of the revenue split and the section on next steps.

In practical terms the route is not yet usable for investors in Germany. As long as no AIP has passed, there is no market in which Bitcoin could be put up as collateral. Anyone holding Bitcoin and thinking about loans against it is dealing with the existing providers until then, and there the MiCA rules apply, including the authorisation requirement for the service provider.

One point often lost in loans against crypto: coins put up as collateral and then lost in a liquidation count as a sale for tax purposes. The one-year holding period for private disposals then decides whether the transaction stays tax-free. That applies today and regardless of how the proposal at Aave turns out.

Aave V4 and Bitcoin: without a Snapshot vote it stays a proposal

Three steps make sense now:

1. Read the proposal in the original, not the summary. The fixed settings and the revenue tiers are there in full; the risk parameters are absent there just as fully. How other platforms set their yields and terms is shown in the comparison of staking and yield platforms.
2. Keep your own custody separate from the lending idea. Bitcoin serving as collateral is tied up, even when it does not leave the blockchain. For holdings meant to sit still, self-custody remains the simpler route; the devices for it are in our hardware wallet comparison.
3. Track the holding period for every piece of collateral. A liquidation is a sale, and without an acquisition date the one-year period cannot be evidenced later. The tools for that are under crypto tax tools and portfolio trackers.

(As of October 15, 2026. This article is not investment advice. Prices and fee structures change; check the terms with the provider before you buy.)