The Bitcoin staking platform Babylon has partnered with the leading decentralized lending protocol Aave, enabling users to leverage BTC directly as collateral without the need for wrapping or centralized custody.
In addition to lending, Babylon is also poised to expand its vault design into decentralized finance (DeFi) insurance, permitting BTC to act as collateral for coverage against protocol vulnerabilities. BTC deposits into insurance pools would gain yield if no claims are made, while ensuring liquidity for claims when hacks occur.
This initiative is currently under development, with an announcement expected by January 2026, according to Babylon co-founder David Tse’s interview with CoinDesk.
Babylon and Aave Collaborate to Transform BTC Lending
While BTC-backed lending has evolved into a multibillion-dollar industry, a significant portion of this activity relies on custodial models, where users receive a tokenized form of bitcoin. Even the largest model — Wrapped Bitcoin (WBTC) — accounts for a mere fraction of Bitcoin’s total market capitalization, a critical limitation for DeFi protocols seeking increased liquidity.
Using native BTC instead of a wrapped version could revolutionize lending markets, Tse noted to CoinDesk.
“Even a 5% entry of Bitcoin’s supply into lending protocols would be monumental compared to current availability,” Tse remarked.
Babylon’s own Bitcoin staking service manages over 56,000 BTC ($5.15 billion), indicating robust demand for productive applications of BTC. Users, according to Tse, “wish to hold Bitcoin while earning on it,” making lending a logical starting point.
The initiative with Aave seeks to merge Babylon’s trustless vaults — which facilitate the utilization of native bitcoin in the broader blockchain ecosystem — with Aave’s “hub and spoke” architecture. Babylon plans to integrate a dedicated Bitcoin-backed “spoke” into Aave’s lending “hub,” allowing users to deposit genuine Bitcoin on its base chain while borrowing stablecoins and other assets from Aave’s markets.
Testing is scheduled to start in early 2026, with a product launch anticipated around April.
