Bitcoin staking project Babylon has teamed up with the largest decentralized lending protocol Aave, making it possible to use BTC directly as collateral without wrapping or centralized depository.
In addition to lending, Babylon is also preparing to extend its vault design to decentralized finance (DeFi), allowing BTC to serve as collateral to hedge against protocol hacks. BTC would be deposited into insurance pools would earn returns if payouts do not occur, while providing liquidity for claims when hacks occur.
This initiative is under development and is expected to be announced in January 2026, Babylon co-founder David Tse told CoinDesk in an interview.
Babylon and Aave join forces to reshape BTC lending
Although BTC-backed lending has become a multibillion-dollar sector, much of this activity relies on custody models where users are given a tokenized version of bitcoin. Even the largest of these – Wrapped Bitcoin (WBTC) – makes up far less than 1% of bitcoin’s total market capitalization, a key limitation for DeFi protocols hungry for deeper liquidity.
Unlocking native BTC, as opposed to a packaged version of bitcoin, could reshape lending markets, Tse told CoinDesk.
“Even 5% of Bitcoin’s supply entering lending protocols would be huge compared to what’s available today,” Tse said.
Babylon’s own Bitcoin stake product secures over 56,000 BTC ($5.15 billion), suggesting healthy demand for productive BTC use cases. Users, Tse said, “want to hold Bitcoin while earning from it,” and lending is the most natural starting point.
The project is teaming up with Aave to combine the former’s trustless vaults — which allow native bitcoin to be put to work elsewhere in the blockchain ecosystem — and the latter’s “hub and spoke” architecture. Babylon will build a dedicated Bitcoin-backed “spoke” into Aave’s lending “hub” that will allow users to deposit actual Bitcoin on its base chain while borrowing stablecoins and other assets on Aave’s markets.
Testing should begin in early 2026 with a view to unveiling the product around April.
