Bitcoin staking project Babylon has partnered with the largest decentralized lending protocol Aave, allowing BTC to be used directly as collateral without wrapping or centralized custody.
Beyond lending, Babylon is also preparing to expand its vault design to decentralized finance (DeFi) insurance, allowing BTC to serve as collateral for coverage against protocol attacks. BTC would be deposited in insurance pools and earn returns if payments do not occur, while providing liquidity for claims when attacks occur.
That initiative is in development and is expected to be announced in January 2026, Babylon co-founder David Tse told CoinDesk in an interview.
Babylon and Aave team up to reshape BTC lending
Although BTC-backed lending has become a multibillion-dollar sector, much of that activity is based on escrow models, whereby users receive a tokenized version of bitcoin. Even the largest of them, Wrapped Bitcoin (WBTC), makes up much less than 1% of bitcoin’s total market capitalization, a key limitation for DeFi protocols hungry for greater liquidity.
Unlocking native BTC, as opposed to a packaged version of bitcoin, could reshape lending markets, Tse told CoinDesk.
“Even 5% of Bitcoin supply entering lending protocols would be huge compared to what is available today,” Tse said.
Babylon’s own Bitcoin staking 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 loans are the most natural starting point.
The project is partnering with Aave to combine the former’s trustless vaults, which allow native bitcoin to work in other parts of the blockchain ecosystem, and the latter’s “hub and spoke” architecture. Babylon will build a dedicated Bitcoin-backed “spoke” on Aave’s lending “hub,” allowing users to deposit real Bitcoin on its base chain while borrowing stablecoins and other assets on Aave markets.
Testing is planned to begin in early 2026, with a view to introducing the product around April.
