Very cool to see native BTC as collateral on Aave.

Babylon's temp check PASSED to deploy two Aave V4 spokes where you borrow against BTC that never leaves Bitcoin chain.

So no wrapping, no bridging, no custodians.

How it works, as I understand it:

- You lock BTC into a Taproot vault on Bitcoin. The script is fixed at creation: who can ever redeem BTC, and which Ethereum contract decides who currently holds that right.

- Aave mints vaultBTC against it, a transfer-restricted ERC-20 for accounting. You borrow stables or any other asset on a dedicated V4 spoke.

- Repay the loan, submit a ZK proof of repayment on Bitcoin, get your coins back.

But how do you liquidate on slow Bitcoin mainnet?

Nothing gets liquidated on Bitcoin in real time. Liquidators liquidate you on Ethereum, then instantly swap the seized vault for WBTC from the Aave hub at a small premium.

Permissioned arbitrageurs later buy the escrowed vault, repay the WBTC, and redeem the actual BTC on Bitcoin through a fraud-proof window that takes days.

And no, you can't watch the price dump and move your BTC to another wallet.

Locking means the coins sit in a UTXO that only the vault script can release.

Your Ledger txs can't move BTC same as you can't spend from a multisig alone.

Claims without a valid proof get challenged and blocked during the fraud window.

This is super cool and 2022/23 CT would be full with discussions about it.

Also 'trustless' does some work here mainly because arbitrageurs are a permissioned entity.

Babylon has ~51k BTC ($3.1B) staked natively, so demand for skipping wrappers is here.

Personally, I love the idea of native BTC but wBTC risk is replaced by experimental risks in the meantime.

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