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Babylon Labs has advanced a plan to let holders borrow stablecoins on Aave against native Bitcoin ($BTC), submitting an updated proposal to the Aave Request for Comment (ARFC) stage on Wednesday. The structure would lock $BTC in vaults on the Bitcoin network and issue a non-transferable token on Ethereum to represent the collateral, allowing the underlying Bitcoin to remain on its native blockchain without being bridged or wrapped.

The proposal follows Babylon Labs' initial submission on May 25 and a preliminary community vote that passed on June 10. Under the terms outlined, the Aave DAO would receive the first $500,000 in qualifying annual revenue generated by the integration.

The new design is positioned as an alternative to Aave's existing support for loans against tokenized Bitcoin, which currently includes Wrapped Bitcoin ($WBTC) and Coinbase Wrapped Bitcoin ($cbBTC). Those wrapped tokens rely on custodians to hold the underlying Bitcoin, a structure that introduces counterparty risks not present in the vault-based approach.

As of Thursday, the proposal remained at the ARFC stage, where it is subject to community feedback and risk analysis. If community consensus is reached, the measure can proceed to a three-day offchain Snapshot vote requiring at least 320,000 AAVE-equivalent votes in favor, after which it would advance to a formal onchain vote subject to quorum and approval thresholds under Aave's governance rules.