Aave proposed native Bitcoin market relies on WBTC for liquidation payments

Babylon Labs has proposed a native Bitcoin lending market on Aave V4, but direct liquidations will still rely on Wrapped Bitcoin (WBTC) to settle specific payment requirements. CryptoSlate reported that three distinct payment rules control the proposed market. Even if an operator bypasses the shared lending pool of Aave, the system must use WBTC when application fees or borrower compensation are due. [1]

According to CryptoSlate, the design allows an operator holding redemption rights for the vault's Bitcoin to bypass Aave pool funding directly. However, liquidations cannot complete if required WBTC payments are unable to move. This dependency applies to application fees, borrower surplus, and existing WBTC-denominated debt. [1]

The findings originate from an October 23 pre-listing assessment conducted by risk assessor LlamaRisk, CryptoSlate reported. The evaluation highlighted that while direct routes exist for collateral redemption, secondary payment rules retain separate settlement dependencies on the Ethereum-based wrapped asset. [1]

Aave is a decentralized finance protocol known for pioneering features like flash loans and issuing its native stablecoin GHO. The underlying Bitcoin network operates on a proof-of-work mechanism with a fixed supply cap of 21 million units. [8][9]