3 payment rules control Aave’s native Bitcoin market, but only WBTC settles them

Babylon Labs’ proposed native Bitcoin lending market on Aave V4 would still need Wrapped Bitcoin (WBTC) for its direct-liquidation fallback whenever application fees or borrower compensation are due.

An operator with the vault’s Bitcoin redemption rights could bypass Aave’s shared lending pool yet still be unable to complete a liquidation if those WBTC payments cannot move.

The distinction comes from risk assessor LlamaRisk’s Oct. 23 pre-listing assessment. The direct route can avoid the funding constraint of running out of WBTC lending capacity by having an authorized keeper finance the liquidation itself. Required payment failures can affect both routes.

If the borrower owes WBTC, the keeper must transfer WBTC to repay the loan even when the application fee and borrower-surplus payment are zero.

The assessment said the integration contracts had not been deployed on Ethereum mainnet. Babylon’s contract directory, checked Oct. 25, identifies its published addresses as Sepolia testnet deployments.

A borrower’s native BTC would remain in a Bitcoin vault, and Aave would recognize that collateral through a restricted internal ERC-20 accounting record, which users cannot trade as a wrapped Bitcoin token.

Through the proposed Liquidation Liquidity Provider (LLP) route, an outside liquidator would repay the borrower’s debt and receive an immediate WBTC payout.

The settlement component, BTCVaultSwap (the Swap Spoke), would place the seized vault in escrow and draw the payout from Aave’s shared liquidity pool (the Hub). The underlying BTC would remain on Bitcoin.

An authorized keeper acting as an arbitrageur would then be expected to buy the escrowed vault and handle redemption on Bitcoin. The process depends on a willing eligible buyer completing that purchase.

The Babylon proposal also describes a direct route for keepers with the vault’s committed Bitcoin redemption rights. Such a keeper would fund debt repayment and take the seized vault into redemption without the Swap Spoke’s new Hub-funded payout or its escrow step.

When the Hub WBTC allowance runs out, a keeper able to supply the required payment assets can avoid that funding constraint. However, the pool of available participants would narrow to operators equipped and authorized to claim the underlying Bitcoin.

Babylon’s liquidation operator guide says it collects debt repayment and two additional charges: the application liquidation fee and any fairness payment owed to the borrower. For direct liquidation, both additional charges are denominated in WBTC and funded by the caller.

The debt repayment uses the token of the borrower’s selected debt reserve. The adapter pulls the repayment input and refunds whatever Aave’s lending contract does not consume. The repayment input is separate from the caller’s limit on additional WBTC payments.

The keeper therefore needs assets for the debt, the fee, and any surplus payment. Its own inventory supplies funding outside the Hub, subject to each required token transfer working.

The assessment describes the Babylon application fee as 0.5% of liquidation bonus profit. The assessed design separately forces the Babylon lending Spoke’s own liquidation fee to zero while retaining the application fee at the adapter.

For the direct route to avoid the stated WBTC fee and surplus obligations in LlamaRisk’s transfer-failure scenario, the application liquidation fee must be zero and no fairness payment can be due. Those conditions address only those two payments.

A WBTC loan still needs WBTC repayment even in that exception. For a loan in another asset, repayment uses that asset, while the keeper still needs transferable debt tokens, redemption rights, and functioning liquidation contracts.