Native Bitcoin collateral on Aave triggers WBTC pool deficit
Summary
Babylon Labs has proposed a native Bitcoin lending market for Aave. Borrowers would lock BTC in Taproot vaults, while liquidations could be settled quickly in WBTC drawn from an Aave liquidity Hub; eligible buyers would later repay the draw and redeem the BTC. Authorized keepers could instead finance repayment and redeem directly. The proposal’s key unresolved risk is who absorbs losses if a vault’s value fails to cover the WBTC draw: the initial protection framework does not cover WBTC, and no funded backstop is specified. Hub liquidity limits could also restrict open liquidations. Governance, risk parameters, funding limits, security reviews and other deployment details remain pending.
