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Babylon Labs proposes integrating native Bitcoin collateral in Aave V4

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Babylon Labs has proposed a temperature check in the Aave community, suggesting integrating native Bitcoin as collateral on Aave V4 through the Babylon Trustless Bitcoin Vaults protocol. The solution does not require encapsulation, cross chain bridges, or custodians. Users lock their Bitcoin in the Taproot UTXO, and redemption is controlled by on chain rules and settled directly to the Bitcoin UTXO. The proposal includes deploying two Aave V4 Spokes: the Babylon Core Lending Spoke and the BTC Vault Swap Spoke. The collateral exists in the form of vaultBTC, which is an ERC-20 token with restricted transfer and can only be transferred between fixed whitelist addresses.

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