Babylon’s Aave Plan Could Expose Wrapped Bitcoin Suppliers to Deficits

Babylon Labs’ proposed native-Bitcoin lending design for Aave V4 would pay permissionless liquidators in Wrapped Bitcoin (WBTC), potentially exposing suppliers to a Hub deficit if escrowed collateral falls short. The design would let borrowers lock Bitcoin (BTC) in Taproot vaults on the Bitcoin network. A transfer-restricted accounting token would represent each position inside Aave, while the BTC remains on Bitcoin rather than being wrapped or bridged to Ethereum. The first use case is borrowing stablecoins against BTC. The liquidation details extend Babylon’s earlier native-Bitcoin borrowing coverage . The proposed permissionless liquidation route uses a separate BTC Vault Swap Spoke to draw WBTC from a shared-liquidity Hub and pay the liquidator at an oracle price minus a sell discount. That lets liquidation settle before the Bitcoin collateral can be redeemed.

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