3 payment rules control Aave’s native Bitcoin market, but only WBTC settles them
LlamaRisk’s Oct. 23 assessment says Babylon Labs’ proposed Bitcoin-backed lending integration with Aave V4 would use WBTC for the standard liquidation route and may still require WBTC for direct liquidations. A direct-liquidation keeper can bypass shortages in Aave’s shared WBTC pool, but must fund the debt repayment and any application fee or borrower-surplus payment from its own assets. Even with those extra charges set to zero, a WBTC loan requires WBTC repayment. Direct liquidation also depends on authorized Bitcoin redemption rights, working transfers and contracts, and may leave the keeper waiting several days for Bitcoin redemption. The integration was not deployed on Ethereum mainnet as of the assessment; listed contracts were on Sepolia. LlamaRisk recommended an initial 100 WBTC liquidity line, with a proposed launch capped at 300 BTC and limited to allowlisted borrowers and vaults.
