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Native Bitcoin Collateral on Aave Triggers WBTC Pool Deficit


Babylon Labs’ Aave V4 proposal for a native Bitcoin lending market keeps collateral on Bitcoin while using wrapped Bitcoin (WBTC) to settle liquidations immediately. Suppliers financing those payouts would face any shortfall without a funded backstop.
The design, detailed in an Oct. 14 Request for Comment, separates fast liquidation from the slower redemption of Bitcoin collateral. When a position becomes liquidatable, an outside liquidator repays the borrower’s debt through an adapter. The seized vault is then sold to the BTC Vault Swap Spoke, a settlement component that draws WBTC from an Aave Hub and pays the liquidator at an oracle-based price minus a sell discount. That exchange lets the liquidator...
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BTCBTC-0.95%
WBTCWBTC-0.50%
AAVEAAVE-5.27%


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