- Babylon and Aave are teaming up to enable native BTC as collateral for DeFi lending.
- BTC can now support decentralized insurance pools and earn returns when not in use.
- Users maintain full control over their Bitcoin while having access to DeFi liquidity.
In a groundbreaking move for the decentralized finance (DeFi) ecosystem, Bitcoin staking platform Babylon has done this announced a partnership with Aave, one of the largest decentralized credit protocols.
The partnership aims to enable Bitcoin (BTC) holders to use their own unwrapped BTC as collateral for loans and participate in a groundbreaking DeFi insurance model.
This will reshape the way Bitcoin interacts with DeFi, unlocking liquidity while maintaining the security Bitcoin users expect.
Native Bitcoin Collateral is Coming to DeFi
Traditionally, using Bitcoin in DeFi requires packaging it into a tokenized version like WBTC, which involves custody risks and extra steps. Babylon’s partnership with Aave eliminates this barrier by allowing users to directly deposit their original BTC as collateral.
Through Babylon’s trusted Bitcoin Vaults, BTC can be locked into a time-bound contract on its own blockchain and recognized by Aave’s hub-and-spoke lending architecture.
This allows users to borrow stablecoins or other crypto assets while retaining full control of their Bitcoin keys.
This move is expected to significantly increase the liquidity of BTC in DeFi. Currently, even the largest Bitcoin initiatives account for less than 1% of Bitcoin’s total market capitalization.
Babylon’s own staking product secures over 56,000 BTC, demonstrating strong demand for productive use of Bitcoin.
By unlocking native BTC for lending, the partnership could bring a substantial portion of the dormant Bitcoin supply into productive DeFi applications, potentially transforming lending markets.
DeFi insurance backed by Bitcoin
In addition to lending, Babylon is preparing to expand its vaults into the insurance sector, a development that could redefine how DeFi protocols manage risk.
The proposed model allows BTC holders to deposit their Bitcoin into decentralized insurance pools.
These pools would serve as cover against protocol hacks and other failures. Depositors earn returns if no claims occur, while the pool provides liquidity for payouts in the event of a validated exploit.
This approach makes Bitcoin a fundamental asset for DeFi risk management and provides a new avenue for generating returns while protecting the ecosystem.
Babylon co-founder David Tse told CoinDesk that the insurance initiative is still in development, with an official announcement expected in January 2026.
Testing of BTC’s integrated credit and insurance products will begin in early 2026, with a wider rollout planned around April of the same year.
The combination of Babylon’s secure vault design and Aave’s extensive liquidity network creates a framework that prioritizes both security and usability, a balance that is often lacking in cross-chain and custody solutions.
Transforming Bitcoin’s Role in DeFi
This partnership addresses long-standing challenges in Bitcoin DeFi adoption.
By removing the need for wrapped assets and custodial intermediaries, systemic risk is reduced while Bitcoin holders can deploy their capital more efficiently.
Users can engage in credit and insurance activities without giving up control of their Bitcoin, in line with the core principles of security and decentralization that have long defined the Bitcoin network.
Experts in the field see this collaboration as a potential catalyst for broader adoption of BTC in decentralized applications.
Unlocking even a small portion of Bitcoin’s supply for lending and insurance could significantly deepen liquidity and reshape market dynamics.
For the average user, this translates into safer, more streamlined, and more productive ways to generate returns from their assets.
