Babylon Labs Claims Breakthrough in Using Native Bitcoin Collateral in DeFi: Finance Redefined
Babylon Labs, a Bitcoin infrastructure company, has announced a potential breakthrough in decentralized finance (DeFi). The company claims to have developed a system that allows native Bitcoin (BTC) to be used as trustless collateral for borrowing on the Ethereum blockchain. This innovation could significantly expand Bitcoin's utility and unlock its potential within the DeFi ecosystem.
Currently, DeFi utilizes less than 1% of Bitcoin's approximately $1.8 trillion market capitalization. Existing methods for using Bitcoin in DeFi often involve wrapping or bridging, which introduce trust assumptions and potential risks. Wrapped Bitcoin (WBTC), for example, requires users to trust a centralized custodian to maintain the peg between WBTC and the underlying BTC.
Babylon's proposed system aims to eliminate these trust assumptions by enabling native BTC to be locked in trustless vaults. These vaults use BitVM3 and zero-knowledge proofs (ZKPs) to enforce smart contract logic while the BTC remains on the Bitcoin blockchain. This means users can collateralize their Bitcoin without relying on intermediaries or custodians.
David Tse, co-founder of Babylon Labs and Stanford University professor, explained the system in an X post, stating that it allows native Bitcoin to be used "trustlessly as collateral to borrow on Ethereum for the first time".
How the "Trustless Vault" System Works
In a simplified example, a user, "Bob," could lock 1 BTC into a vault and borrow $50,000 in a stablecoin from "Larry" via a lending protocol on Ethereum. If Bitcoin's price falls below $50,000, the smart contract would allow Larry to liquidate the collateral. If Bob repays the loan on time, he recovers his BTC.
Babylon leverages BitVM3, a Bitcoin-native proof verification framework using ZKPs and garbled circuits, to ensure BTC never leaves the Bitcoin blockchain. This design enforces DeFi logic, including liquidations and redemptions, without the need for intermediaries, allowing native Bitcoin to function as collateral on Ethereum, Cosmos, and other chains.
Trustless... With Caveats
While the core mechanism is designed to be trustless, some aspects of Babylon's system still involve trust assumptions. The liquidation process relies on whitelisted liquidators to monitor price oracles and vault states. This introduces potential risks related to the behavior of these liquidators and the accuracy and censorship-resistance of the price oracles.
Despite these caveats, Babylon's approach represents a significant step forward in integrating Bitcoin with DeFi. By minimizing the need for trust, the system could unlock substantial capital and expand the use cases for Bitcoin in decentralized finance.
Broader Implications
Babylon's trustless vaults are part of a broader effort to integrate Bitcoin into decentralized economies. The company also has a $5 billion Bitcoin staking protocol that went live on mainnet in August 2024. By combining vault functionality with staking rewards, Babylon aims to position Bitcoin as a core asset for securing proof-of-stake networks.
The launch of Babylon's mainnet in April 2025 saw 50,000 BTC locked in non-custodial staking to secure its new network. This demonstrates the growing demand for solutions that allow Bitcoin holders to earn yield and participate in DeFi without compromising the security of their assets.
