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24 October 2026 | 12:11 Grayscale’s latest valuation data shows Aave and Jupiter with positive earnings yields, yet holders of both tokens face negative yields once buybacks, rewards and supply growth are netted.

Key Takeaways ✓AAVE: 3.7% earnings yield, -1.0% holder yield ✓JUP: 3.5% earnings yield, -2.6% holder yield ✓Aave bought 205,000 AAVE in ten months ✓Litterbox Trust has burned about 134 million JUP Grayscale head of research Zach Pandl set out both measures in an October 21 note on crypto valuations.

Earnings are positive, holder yields are not Grayscale’s adjusted earnings yield divides a protocol’s earnings by its circulating market value, then subtracts the rate at which circulating supply grew. Its tokenholder yield counts only what reaches holders: staking rewards plus buybacks, minus new issuance, divided by circulating market value. Earnings here means fees left after paying lenders, liquidity providers and other suppliers.

Both measures subtract supply growth, so the gap between them approximates earnings that stayed with the protocol instead of reaching holders, as long as Grayscale’s issuance figure tracks circulating-supply growth. A negative tokenholder yield also means, by Grayscale’s formula, that new issuance outweighed buybacks and staking rewards combined.

AAVE

Adjusted earnings yield3.7%

Tokenholder yield−1.0%

Gap≈ 4.7 points

JUP

Adjusted earnings yield3.5%

Tokenholder yield−2.6%

Gap≈ 6.1 points

Source: Grayscale, chart accompanying its October 21 note.

Aave’s buybacks refill a reserve that pays out AAVE Aave began buying AAVE on the open market in April 2025. Its official documentation lists a $50 million annual budget, with weekly purchases of $250,000 to $1.75 million executed by the Aave Finance Committee. The DAO’s funding report says the program acquired more than 205,000 AAVE, about 1.28% of total supply, in its first 10 months.

Aave does not burn the tokens it buys. They go to the Aave DAO Ecosystem Reserve, which pays staking rewards, grants and service providers, so AAVE taken off the market can return to circulation. That may help explain how a sustained buyback program sits beside a negative tokenholder yield.

Operating costs draw on the same revenue. A March governance proposal sought to cut the buyback budget to $30 million. It cited borrow-fee revenue about 25% below its peak, January 2026 revenue of $7.95 million against $13.5 million a year earlier, and an optimistic 2026 operating budget of $190 million against 2025 revenue of $142 million. The proposal also made the case against bigger buybacks: spending on GHO stablecoin liquidity and growth could return more to holders than repurchases.

Jupiter spends half its onchain revenue on JUP Jupiter’s transparency page says 50% of onchain revenue has gone to the Litterbox Trust since February 2025, which buys JUP through automated onchain purchases. The trust operates as a long-term reserve and has burned about 134 million JUP. The other half of onchain revenue and all offchain revenue fund the team’s operations, with any excess going to treasury reserves.

In Grayscale’s figures, those purchases and burns have not kept pace with new JUP entering circulation. The note names token unlocks alongside issuance as sources of dilution, which makes Jupiter’s unlock schedule the other half of the JUP picture.

Ordinary holders sit below the published figure. JUP holders receive no direct share of protocol fees, and Active Staking Rewards go quarterly to stakers based on time-weighted stake. Under Jupiter’s tokenomics rules, locked team tokens cannot earn them. Because Grayscale’s tokenholder yield includes staking rewards, anyone holding JUP or AAVE without staking earns less than it shows.

Burns remove tokens for good, minus new minting A burn is the one destination that cannot pay tokens back out, though minting can still eat into it. PancakeSwap’s September burn report puts numbers on that offset.

2,963,567 CAKE burned
−
652,564 CAKE minted
=
2,311,003 CAKE net cut

Minting offset about 22% of the burn. The report excludes mints tied directly to burning and spreads weekly burns across reporting months. According to PancakeSwap’s tokenomics documentation, minted CAKE funds farms, the lottery and ecosystem growth.

Hyperliquid burns without a matching mint on this side. Its fee documentation says the Assistance Fund converts allocated trading fees into HYPE and burns them. Hyperliquid has since added reserve-income funding to its buyback model, which raises the money available for purchases without itself showing how much was bought.

Three disclosures that will test these numbers What to watch Where it appears Timing Aave’s buyback budget and executed purchases Aave governance forum, TokenLogic dashboard As budget proposals are voted on JUP unlocks against Litterbox buys and burns Jupiter transparency page, Litterbox Trust wallet Alongside each quarterly staking reward round CAKE net supply change PancakeSwap monthly burn report The October report If Grayscale updates its chart, a narrower gap between the two yields would show more of AAVE’s and JUP’s earnings reaching holders, while a wider one would point to supply growth or retained spending absorbing more of them.

This article is provided for informational purposes only and does not constitute financial or investment advice. Research yield estimates are not guaranteed payouts or forecasts of token-price performance.

Author

Alexander Zdravkov is a market analyst and crypto journalist with interests in economics, broader financial markets and digital assets. His journey into crypto began more than four years ago, driven by a fascination with the rapid evolution of blockchain technology and the transformative potential of decentralized finance. He began analyzing market cycles and identifying emerging trends before they reach the mainstream. He holds a degree in International Relations - a background that helped shape his broader perspective on global economics, geopolitics, and the interconnected nature of modern financial markets. Whether covering the latest developments in the crypto sector or exploring broader macroeconomic themes, Alexander focuses on giving readers context rather than simply repeating headlines. During his career, he has authored more than 5,000 articles covering cryptocurrencies, traditional finance, and global market developments. His work spans everything from Bitcoin and altcoins to macroeconomic trends influencing risk assets worldwide.

5 hours ago

According to EmberCN monitoring, an institution with investments in both Aave and Worldcoin transferred tokens worth around $33.18 million to multiple centralized exchanges approximately one hour ago. The moved tokens include 6,000 ETH (valued at ~$14.4 million), 19 million WLD (~$9.67 million), and 62,000 AAVE (~$9.11 million).

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Ethena’s USDe goes native on OKX’s X Layer, with Aave first in line

TLDR Aave V4 has launched its first externally curated lending markets, managed by Sentora on Ethereum. Users can borrow Ripple’s RLUSD, PayPal’s PYUSD and Origin’s OUSD against selected crypto assets. A Bluechip market lets users borrow stablecoins against kBTC, a Bitcoin-backed asset. Aave DAO keeps ownership of the contracts, and risk-raising changes face a 48-hour timelock. Aave V4 deposits passed $1 billion in September, with $310 million in active loans. Aave has launched its first externally curated lending markets on its V4 protocol. The markets are managed by Sentora, an institutional decentralized finance (DeFi) platform.

The three new markets run on Ethereum. They let users borrow three stablecoins against selected crypto assets.

The stablecoins are Ripple’s RLUSD, PayPal’s PYUSD and Origin’s OUSD. Users can access the markets through Aave Pro, the platform’s interface for curated lending products.

Sentora sets the risk rules for each market, including which assets can be used as collateral. Aave DAO keeps ownership of the underlying contracts.

How the Sentora Markets Work All three markets draw from a Sentora Liquidity Hub on Ethereum. The Hub holds the assets available for borrowing and supplies liquidity to each market.

The RLUSD Yield market lets users borrow RLUSD against USDe, PRIME, mWIN and PST. The OUSD Yield market accepts the same collateral but lends OUSD instead.

A third market, called Bluechip, supports borrowing RLUSD, PYUSD and OUSD against kBTC. kBTC is a Bitcoin-backed asset.

Each market has its own borrowing conditions. Sentora manages collateral settings, interest rate curves, price oracles and liquidation rules.

In an October 22 research article, Sentora called the launch the first governance-approved Hub and Spoke deployment run by an external curator on Ethereum. Its architecture diagram also lists a planned PYUSD Yield market, though its collateral has not been confirmed.

Sentora has worked on stablecoin lending before. In August, it approved FXRP as collateral in its RLUSD lending vault on Morpho.

How Aave V4 Manages Lending Risk Aave V4 uses a Hub and Spoke design. Hubs hold funds and track supplied assets, while Spokes set borrowing rules and liquidation points.

Positions are tracked separately in each Spoke. This means a user’s collateral and debt in one market are not combined with positions in another.

Borrowing costs depend partly on how much of an asset’s liquidity is in use. V4 can also add a risk premium, so borrowers using riskier collateral may pay higher interest.

Any change that raises market risk must pass a 48-hour timelock. New collateral assets need Aave governance review before they can be listed.

Sentora says it has allocated more than $2 billion across onchain strategies. Its Risk Radar system tracks more than 40 DeFi protocols on over 12 blockchains and now covers Aave V4.

The V4 design already supports other products. In September, Aave opened an equities market on Base that accepts seven Coinbase tokenized stocks as collateral for USDC loans, with a $21 million initial borrowing cap.

Aave Labs reported that V4 deposits passed $1 billion in September, with $310 million in active loans.

Aave is also reviewing an October 14 proposal from Babylon Labs. It would allow stablecoin borrowing against native Bitcoin held in vaults on the Bitcoin blockchain, pending governance approval, final risk settings and security checks.

Aave founder Stani stated in a Q3 live stream that Aaveonomics 3.0 will include AAVE repurchases, staking, and burns. AAVE repurchases have been suspended since April 19, the day after the rsETH exploit incident. Since then, the DAO has committed 25,000 ETH to DeFi United to cover losses, and arranged a credit line of up to 30,000 ETH from Mantle. Ahead of the repurchase suspension, a forum proposal had suggested cutting the annual repurchase budget from roughly $50 million to $30 million.

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Aave V4 has taken the lead among decentralized finance platforms for Coinbase-issued tokenized stocks on the Base network, with deposits reaching $10.1 million. Token Terminal data shows that Aave controls approximately 53% of the total value locked (TVL) for this market segment, which currently stands at $18.9 million across DeFi venues.

Tokenized equities drive surge in DeFi collateralThe Equities Hub in Aave V4, operating on Base, enables eligible users to leverage tokenized versions of major U.S. company stocks as collateral to borrow USDC. Currently, the platform supports tokenized shares of Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla, all issued by Coinbase, a leading cryptocurrency exchange based in the United States.

By integrating Chainlink price feeds, Aave ensures accurate valuation of these collateral assets. At this stage, the tokenized equities can only be used as collateral and are not available to be borrowed directly from the platform. This arrangement provides stablecoin liquidity to users while maintaining exposure to their tokenized stock holdings. Token Terminal places Aave’s share at $10.1 million out of the total $18.9 million deposited across DeFi protocols for Coinbase-issued tokenized stocks on Base, giving it the largest share among its competitors.

Mini dictionary: Token Terminal is a data analytics platform that tracks financial and usage metrics for decentralized protocols. It serves as a reference for investors and market participants assessing DeFi activity and trends.

These totals highlight Aave’s strong position in the new market for tokenized-equity collateral. However, the share only reflects deposits for tokenized stocks, and does not represent Aave’s overall market share in decentralized lending.

Aave expands access to USDC liquidityThe increase in tokenized equity deposits underscores the connection that is forming between traditional financial markets and decentralized lending platforms. By allowing users to deposit tokenized stock as collateral, Aave expands avenues for participants to access USDC liquidity on-chain, without selling their holdings outright.

This functionality is designed to attract investors who want to interact with blockchain-based versions of established equities within DeFi ecosystems. At the same time, the addition of these assets broadens the scope of collateral supported on Aave and may encourage greater engagement among users looking for diversified lending opportunities.

A growing number of deposits and borrowing activity on Aave could hint at rising demand for these financial instruments. Still, TVL alone does not provide a full picture of the revenue or adoption rate for the Equities Hub. The potential for continued adoption will depend on the appeal of tokenized stocks and the growth of the ecosystem on Base.

AAVE price analysis: Support and resistance zones in focusAlongside the growth of tokenized stock deposits, AAVE’s token price is currently testing a key support band. Market analyst Crypto With Gopal identified a potential double-bottom pattern for AAVE at the $147-$148 range. This formation typically signals attempts by buyers to defend a price level following a period of decline.

The resistance level between $165 and $166 has emerged as the neckline for this technical pattern. For a trend reversal to be confirmed, AAVE’s price would have to break above this resistance. Should such a move occur, Gopal projects potential upside targets in the $185-$190 region. However, these targets only become relevant if the price action confirms a decisive breakout.

LevelTypeValue ($)SupportDouble Bottom Zone147-148ResistanceNeckline165-166TargetPost-Breakout185-190A drop below the $147-$148 support would weaken the likelihood of a successful reversal, while rejection at the $165-$166 resistance would leave the double-bottom scenario unconfirmed. Whether buyers can maintain momentum above support and break through resistance will likely determine AAVE’s short-term price direction.

Crypto With Gopal points to a double-bottom pattern forming at the $147-$148 level. If AAVE breaks through the resistance band at $165-$166, targets move to the $185-$190 area. Confirmation depends on sustained buying above support and a clear move above resistance.

Beyond technical signals, factors such as ongoing demand for tokenized equities and broader DeFi market trends will also influence price action. Increased adoption of Aave’s Equities Hub could serve as evidence of its strengthening role in the Base network.

Stock longs on Base use Aave loans, while PendleLoop fees on non-PT positions are waived through Dec. 31.

Stock longs on Base use Aave loans, while PendleLoop fees on non-PT positions are waived through Dec. 31.

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LlamaRisk recommends a 55% collateral factor and a 37,000-token cap, with larger liquidations dependent on redemptions or derivatives hedges.

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LlamaRisk recommends a 55% collateral factor and a 37,000-token cap, with larger liquidations dependent on redemptions or derivatives hedges.

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Crypto lending has grown back into a credit market worth tens of billions of dollars. It rebuilt after Celsius, BlockFi, Genesis and other large lenders failed during the 2022 crypto crisis.

The industry looks different in 2026. Decentralized protocols such as Aave, Morpho and Spark now compete with centralized lenders such as Coinbase, Galaxy, Ledn and Nexo.

This article uses data from Galaxy Research and DefiLlama. It covers market size, loan balances, protocol rankings, interest rates and the main risks.

Crypto Lending Statistics at a Glance

Table of Contents

Galaxy Research put the crypto-collateralized lending market at $56.16 billion at the end of Q2 2026. That was down 16.8% from the quarter before and about 40% below the Q3 2025 record of $78.7 billion.

Metric
Figure

Total market, end of Q2 2026
$56.16 billion

Q3 2025 peak
$78.7 billion

Change in Q2 2026
Down 16.8%

CeFi loans outstanding
$22.98 billion

DeFi loans outstanding (Galaxy)
$20.43 billion

DeFi change in Q2 2026
Down 27.6%

CeFi change in Q2 2026
Down 9.6%

Lending protocol TVL (DefiLlama)
$51.6 billion

Aave V3 active loans
$11.8 billion

Morpho active loans
$5.6 billion

Average stablecoin borrow rate
4.7%

Average stablecoin supply rate
3.6%

Debt tied to treasury strategies
More than $17.5 billion

Sources: Galaxy Research and DefiLlama.

Figure 1: Decline in outstanding crypto loans in Q2 2026. Source: Galaxy Research.

DeFi lending fell the most in the second quarter. CeFi fell by less.

For the first time since Q3 2023, centralized lenders had more outstanding loans than DeFi lending applications.

How Big Is the Crypto Lending Market?
Galaxy’s figure combines several kinds of crypto-backed credit. At the end of Q2 2026, total loans stood at $56.16 billion. That was $11.33 billion lower than three months earlier.

The market was $67.42 billion at the end of Q1 2026. Its record was $78.7 billion in Q3 2025, which puts Q2 2026 about 40% below the peak.

Figure 2: Total crypto-collateralized loans, from the Q3 2025 peak to Q2 2026. Source: Galaxy Research.

Galaxy described the drop as stepwise deleveraging rather than a cascading collapse. Borrowers have cut leverage over several quarters instead of in one event.

That differs from 2022. DeFi borrowing fell by more than 80% then, and several large centralized lenders failed.

The total also includes more than CeFi and DeFi loans. Subtracting both from the $56.16 billion leaves about $12.75 billion. The research says the rest comes largely from crypto-backed stablecoin debt structures.

CeFi vs DeFi Lending
Crypto lending falls into two groups. In centralized finance, or CeFi, a borrower deals with a company such as an exchange or an institutional lender. Examples include Coinbase, Galaxy, Ledn, Nexo, Arch, Sygnum and Milo.

In decentralized finance, or DeFi, borrowing happens through smart contracts. Examples include Aave, Morpho, Spark, Compound and Euler.

The economics can look alike, but the structure is different. DeFi users deposit collateral into smart contracts, and anyone can check liquidity and debt on-chain. Centralized lenders hold collateral internally and usually share less real-time data.

Feature
CeFi
DeFi

Who holds collateral
The lender
Smart contracts

Data visibility
Limited real-time data
Debt and liquidity visible on-chain

Loans, end of Q2 2026
$22.98 billion
$20.43 billion

Change in Q2 2026
Down 9.6%
Down 27.6%

Source: Galaxy Research.

Figure 3: CeFi and DeFi outstanding loans, Q1 and Q2 2026. Source: Galaxy Research.

In Q1 2026, DeFi had $28.22 billion in loans against $25.43 billion for CeFi. By the end of Q2, CeFi led with $22.98 billion to $20.43 billion.

This is not a return to the pre-Celsius model. Today’s large centralized lenders generally stress overcollateralization, institutional clients, better custody, clear balance sheets, shorter loan terms and regulated structures.

Centralized Crypto Loans: About $23 Billion Outstanding
Galaxy estimated CeFi loans at $22.98 billion at the end of Q2 2026. That was down 9.6% from $25.43 billion in Q1. The Q1 figure was already about 30% below the sector’s Q1 2022 record of $36.58 billion.

The low point came in Q4 2023. CeFi loans fell to about $6.8 billion after Celsius, BlockFi, Genesis and other lenders failed. By Q1 2026, the market was more than 270% above that low.

Figure 4: CeFi crypto loans outstanding at key points since 2022. Source: Galaxy Research.

The modern CeFi market leans toward institutional and collateralized lending. It relies less on unsecured retail yield products.

Galaxy’s own loan book shows the shift. Its average loan book was about $1.44 billion in Q2 2026, up slightly from $1.43 billion in Q1. New loans originated rose during the quarter.

Coinbase, Ledn, Arch, Sygnum and Milo also reportedly grew their loan books while the overall market shrank. This suggests lending is moving toward larger, better-capitalized providers.

DeFi Lending Fell More Sharply
Galaxy put outstanding DeFi loans at $20.43 billion at the end of Q2 2026. That was down 27.6% from $28.22 billion at the end of Q1.

The all-time high was about $47.13 billion in September 2025. By July 31, 2026, Galaxy estimated on-chain lending at $21.94 billion, or 53% below the peak.

Figure 5: DeFi loans outstanding from the September 2025 high to July 31, 2026. Source: Galaxy Research.

The July figure is slightly higher than the end-of-June level. The drop from the peak is still large.

It is smaller than the decline of more than 80% in the previous bear market.

Lenders and borrowers can also move between protocols quickly. That helps explain why on-chain balances can change within weeks.

Why TVL Is Not the Same as Lending
A common mistake in crypto lending statistics is treating total value locked, or TVL, as outstanding loans. The two measure different things.

DefiLlama tracks about $51.6 billion of TVL across roughly 515 lending protocols. Much of that is collateral or supplied funds that nobody has borrowed.

Figure 6: TVL compared with active loans for five lending protocols. Source: DefiLlama.

Aave V3 has about $17 billion of TVL but $11.8 billion in active loans. Morpho has about $11.1 billion of TVL and $5.6 billion in loans.

Using $51 billion as the size of DeFi borrowing would overstate actual debt. The table below shows how much of each protocol’s TVL is currently lent out.

Protocol
TVL
Active loans
Loans as share of TVL

Aave V3
$17.0 billion
$11.8 billion
69%

Morpho
$11.1 billion
$5.6 billion
50%

Spark
$6.9 billion
$2.7 billion
39%

Maple
$2.7 billion
$1.89 billion
70%

Compound V3
$1.4 billion
$646 million
46%

Source: DefiLlama, Oct 19, 2026. Share of TVL calculated by Coincentral and rounded.

The share ranges from 39% at Spark to 70% at Maple. A higher share means more of the deposited money is being used for loans. A lower share means more sits idle.

Aave, Morpho, Spark, Maple and Compound
Five protocols account for most of the large on-chain lending books. Each works a little differently.

Aave: the largest DeFi lender
As of October 19, 2026, DefiLlama showed Aave V3 with about $17.0 billion of TVL and $11.8 billion in active loans. Aave V3 runs on more than 20 networks, including Ethereum, Base, Arbitrum, Plasma and Monad.

Ethereum holds about 83% of Aave V3 TVL. The protocol generated about $37 million in fees over the latest 30 days, and $4.75 million of that became protocol revenue. DefiLlama’s trailing annualized fee rate is about $677 million.

Aave’s $11.8 billion in loans equals about 58% of Galaxy’s $20.4 billion DeFi total. The two data sets differ in date and method, so treat that as a rough guide.

Morpho: Aave’s closest challenger
Morpho has about $11.1 billion of TVL and $5.6 billion in active loans. It earned about $22.2 million in fees over the latest 30 days. Its TVL equals about 21.5% of all lending TVL tracked by DefiLlama.

Morpho works as an infrastructure layer. Specialized lending markets and curated vaults are built on top of it.

Figure 7: Fees generated by four lending protocols over the latest 30 days. Source: DefiLlama.

Spark, Maple and Compound
Spark has about $6.9 billion of TVL and $2.7 billion in active loans. Its products include SparkLend, Spark Liquidity Layer and Spark Savings. Ethereum holds close to 90% of its TVL. Spark earned about $19.4 million in fees over 30 days, with annualized fees near $190 million.

Maple focuses on institutional credit and professionally managed lending pools. It has about $2.7 billion of TVL and $1.89 billion in active loans. Its 30-day fees were about $8.1 million, or roughly $110 million on an annual basis.

Compound V3 has about $646 million in active loans and $1.4 billion of TVL. That is well behind Aave, Morpho and Spark. Compound still matters historically, because its early markets helped popularize algorithmic interest rates and permissionless borrowing.

Most DeFi borrowing rates are variable. They rise when utilization rises. Utilization is the share of a lending pool that has been borrowed.

Picture a pool with $100 million of USDC. If $30 million is borrowed, cash is plentiful and rates can stay low. If $95 million is borrowed, cash is scarce and rates climb.

Higher rates push borrowers to repay, draw in new lenders and restore liquidity. The market sets the rate, not a bank.

Figure 8: Market-weighted stablecoin rates and the two largest stablecoins. Source: DefiLlama.

DefiLlama’s market-weighted stablecoin reference rate shows an average supply APY of about 3.6% and an average borrow APY of about 4.7%. That leaves a lending spread of roughly 1.05 percentage points.

USDC borrowing costs about 5.14% and USDT about 4.09%. Rates can change every day as demand and liquidity move.

Borrow Rates by Stablecoin
Borrowing costs differ by stablecoin. USDe is the most expensive of the ten tracked, at about 6.61%. USDtb is the cheapest, at about 3.11%.

Stablecoin
Approx. borrow APY

USDe
6.61%

PYUSD
5.27%

USDC
5.14%

DAI
4.68%

USDS
4.32%

USDG
4.11%

USDT
4.09%

frxUSD
3.90%

RLUSD
3.85%

USDtb
3.11%

Source: DefiLlama, Oct 19, 2026.

Figure 9: Approximate borrow APY for ten stablecoins. Source: DefiLlama

The gap between the highest and lowest rate is about 3.5 percentage points. USDC and USDT, the two largest stablecoins, sit about one point apart.

These are snapshots. They move with borrowing demand and available liquidity.

Supply rates follow the same pattern. Lenders earn less than borrowers pay, and the difference funds the protocol and its reserves.

Borrowing Costs Vary by Protocol
DefiLlama also estimates weighted borrowing rates for each protocol. Fluid is highest at 6.46% and SparkLend is lowest at 4.26%.

Figure 10: Weighted average borrow rates across six lending protocols. Source: DefiLlama.

Compound V3 charges about 6.22%, which is nearly two percentage points above Aave V3 at 4.33%. Morpho Blue sits at 5.00% and Euler V2 at 5.25%.

Gaps like these add up on large loans. On $1 million borrowed for a year, a two-point rate difference equals about $20,000 in interest.

These are broad weighted averages, not guaranteed rates. The actual cost depends on several factors.

The asset borrowed
The blockchain used
Utilization of the pool
The collateral posted
The loan-to-value ratio
Incentive rewards
Market conditions

Why People Borrow Against Crypto
A crypto holder may borrow instead of selling for several reasons.

Keep the asset. An investor may expect Bitcoin to rise but still need cash. They can pledge BTC as collateral and borrow stablecoins.
Trading leverage. Borrowed stablecoins can buy more crypto. This raises both possible gains and possible losses.
Tax planning. In some places, borrowing may not trigger the same tax event as selling. Rules vary, so professional advice is needed.
Business cash. Companies that hold crypto can get working capital without selling treasury assets.
Arbitrage trades. Professional traders borrow assets to trade price gaps between spot, futures and derivatives markets.

Overcollateralization is the norm
Most DeFi loans require collateral worth more than the loan. A borrower might deposit $150,000 of ETH to borrow $100,000 of USDC. That is a loan-to-value ratio of 66.7%.

Figure 11: An example of an overcollateralized loan with a 66.7% loan-to-value ratio.

If ETH falls far enough, the collateral can be sold automatically. This protects lenders, but borrowers take on market risk.

It also explains why crypto loans differ from unsecured personal loans. The borrower’s identity matters less because the collateral can be seized by the protocol.

Liquidations and Smart-Contract Risk
When collateral falls below a protocol’s required level, smart contracts let liquidators repay part of the debt and claim the collateral. This protects lenders. It can also deepen market declines.

A chain of liquidations can unfold in steps:

Crypto prices fall.
Collateral values drop.
Some loans become undercollateralized.
Automated liquidations begin.
More crypto is sold.
Prices come under further pressure.

Price swings are not the only risk. Galaxy reported that DeFi lending was disrupted in Q1 2026 by large exploits involving Drift and LayerZero/KelpDAO.

After the LayerZero/KelpDAO incident, Aave saw more than $5.5 billion of stablecoin withdrawals. About $3.1 billion of stablecoin loans were closed within roughly two weeks.

Figure 12: Aave stablecoin withdrawals and closed loans after the LayerZero/KelpDAO exploit. Source: Galaxy Research.

The episode shows that overcollateralized lending can still see fast capital flight when users lose confidence in collateral or security.

New Demand: Vaults and Treasury Companies
Two newer trends are shaping crypto credit. The first is the growth of lending vaults. The Financial Times reported in October 2026 that these vaults had drawn more than $10 billion, up from roughly $4 billion at the start of 2025.

Some vaults offered yields from about 3% to more than 20%. Higher yields generally point to higher credit, liquidity or collateral risk.

Figure 13: Lending vault deposits and debt tied to digital-asset treasury strategies. Sources: Financial Times, Galaxy Research.

The second trend is corporate leverage. Galaxy estimated that more than $17.5 billion of debt had been used by Q1 2026 to buy digital assets or to support digital-asset treasury strategies.

This links crypto lending to public companies that hold Bitcoin and other tokens. If those strategies spread, loans backed by crypto could become a larger institutional credit market.

The Bottom Line
Galaxy Research valued crypto-collateralized borrowing at about $56.16 billion at the end of Q2 2026. That is roughly 40% below the Q3 2025 peak of $78.7 billion.

Centralized lenders held about $23 billion of loans. DeFi lending applications held about $20.4 billion. The rest came largely from crypto-backed stablecoin debt structures.

Figure 14: Decline from peak for DeFi, total and CeFi crypto lending. Source: Galaxy Research.

Within DeFi, Aave leads with about $11.8 billion of active loans. Morpho follows with $5.6 billion, then Spark with $2.7 billion, Maple with $1.9 billion and Compound V3 with $646 million.

Borrowing is also cheaper than in periods of heavy speculation. The average stablecoin borrow rate is about 4.7%, while lenders earn about 3.6%.

Risks remain. Collateral prices can fall, smart contracts can fail and borrowers can be liquidated automatically.

After the failures of 2022, the sector has rebuilt around overcollateralized loans, open liquidity data and more institutional borrowers. The market is smaller than its 2025 peak, but it is better organized than the one that entered the last downturn.

Sources

Galaxy Research: The State of Crypto Leverage Q2 2026. Centralized lending, DeFi borrowing and collateralized stablecoin debt.
Galaxy Research: Crypto Lending Contracts, But Slowly This Time. Outstanding crypto loans and the comparison with 2022.
Galaxy Research: The State of Crypto Leverage Q1 2026. CeFi loan books, DeFi borrowing and treasury debt.
DefiLlama: Stablecoin Reference Rates. Market-weighted stablecoin borrow and supply rates.
DefiLlama: Aave V3. Aave TVL, active loans, fees and revenue.
Morpho: Network Data. Morpho deposits, outstanding loans and lending activity.
DefiLlama: Morpho. Morpho TVL, active loans, fees and market share.
DefiLlama: Spark. Spark TVL, borrowing, fees and protocol data.
DefiLlama: Maple Finance. Maple institutional lending TVL and active loans.
DefiLlama: Compound V3. Compound V3 lending, TVL, fees and revenue.
Coinbase Institutional: Guide to Crypto Markets 2026. Market structure, leverage, lending and trading infrastructure.

Citi Research spotlighted AAVE as a major player in tokenized finance, calling it the most important real-world use case for tokenized finance. 

The latest Citi Research highlighted Aave as a leading collateral mobility protocol for tokenized capital markets. This positions Aave as one of the most significant real-world user cases for tokenized finance. 

According to the report, Aave V4 has bridged collateral, liquidity, and financing, thus positioning it as a decentralized prime brokerage. Aave can now take functions that move tens of trillions of dollars in traditional finance (TradFi). Therefore, in the future, Aave could become the go-to layer for financing tokenized assets once they move on-chain. 

 Stani Kulechov, Founder and CEO, praised the report, noting that it offers a great overview of where the future of finance is going. He added that Aave is building the backbone of all future finance. 

Could AAVE attract trillions in borrowing?
In addition to its emerging influence in DeFi, Kulechov posited that stock borrowing has great room for growth.

Responding to reports that stocks have continued to grow, reaching $15 million, Kulechov added that Aave is already a multi-million dollar market for borrowing.

He stated that

  As more stocks move on-chain, this becomes a $200 trillion plus opportunity.

Although Stani is very optimistic, Active Loans in the Aave protocol have struggled to recover from the April security incident.

Active loans have remained way below the $18 billion recorded in April. However, after dropping to $9 billion, the number has since rebounded to $12 billion.

Source: Defillama
The gradual recovery probably offers a glimpse of the optimism observed in the market. 

Moreover, capital also continues to flow into the protocol. Between the 19th and 20th of October, for example, the protocol recorded over $213 million in USD inflows. The rising inflows suggested increased demand for the Protocol. 

How is the market responding?
Despite its growing influence within the DeFi, AAVE has shown relative weakness on the charts. 

Since facing rejection at $187 two weeks ago, AAVE has held within a descending channel. The altcoin breached the $150 support and plunged to $148 at press time. 

The price decline indicates that the price has yet to reflect the growing optimism around Aave borrowing or its role in finance. 

In the short term, if Citi Research spotlights, it incentivizes investors to return, and we could see a rebound towards $175. However, if the current direction persists, the altcoin is likely to breach $140 with a potential drop to $134. 

Final summary

Citi Research spotlights Aave as the leading collateral mobility protocol for tokenized capital markets.
Aave is projected to attract over $200 trillion in stock borrowing, as active loans recover from the April incident. 

Not financial or tax advice. PANews content is strictly educational and informational and is not investment advice, financial advice, tax advice, legal advice, or a solicitation to buy or sell any digital asset, security, or financial product. Do your own research and consult qualified advisers.

Disclosure. PANews may publish sponsored content, partner content, advertisements, affiliate links, event promotions, and market commentary involving Web3 projects, service providers, or financial products. PANews personnel, contributors, or affiliates may hold digital assets or other interests related to covered topics. See our Terms of Service.

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Citi Research has named Aave among the leading live applications of tokenized financial infrastructure. Citi sees collateral mobility as one of the first practical uses of asset tokenization. S&P Global data shows Aave controls the largest share of decentralized lending. None of the research amounts to a price call on the AAVE token. Citi Research has named Aave among the leading real-world applications of tokenized financial infrastructure, according to accounts of a research note that circulated on October 20, one week after the bank’s Citi Services unit published a broader paper on tokenized collateral arguing that the technology has left the pilot stage and entered live operations. The timing gives the bank’s view a quantitative backdrop, since S&P Global Ratings released its own detailed review of the Aave lending protocol on October 13.

Citi has not published the full wording of the Aave passage, so its exact phrasing rests on reports of the note, and nothing in the available material points to a price target for AAVE, an investment by the bank or a commercial agreement with Aave Labs.

Collateral That Works Around the Clock Collateral is whatever a borrower pledges to secure a loan, a margin position or a derivatives contract, and in traditional markets moving it between banks, custodians and clearinghouses still depends on business hours and settlement cycles that can stretch over several days. In “The Digital Frontier: Collateral in a Tokenized World,” Citi argues that tokenized assets paired with regulated on-chain cash, such as tokenized bank deposits or stablecoins, make atomic delivery versus payment possible, which means the security and the payment change hands in the same transaction and neither party is left exposed if the other fails to deliver.

The paper also points to tokenized money market fund shares, which an institution could pledge as collateral while they keep earning yield, something cash parked at a clearinghouse usually does not do. Citi expects a multi-year hybrid period in which traditional and tokenized collateral run side by side, and its Citi Institute forecast from June puts the tokenized financial asset market at $5.5 trillion by 2030 in a base case, up from about $17 billion when the report came out, with a bull case of $8.2 trillion.

Aave Already Runs Citi’s Model in Public Aave already runs, on public blockchains, the mechanism Citi describes for institutions: users deposit collateral, borrow against it, and smart contracts enforce the limits and start liquidation when the collateral’s value drops too far. S&P highlights the protocol’s dual thresholds, where one level caps how much a user can borrow and a second, higher level decides when a position gets liquidated, leaving a buffer between the two that protects lenders during sharp price moves.

The institutional version of that model is Aave Horizon, which Aave Labs launched in August 2025 so that qualified institutions could borrow stablecoins against tokenized securities and real-world assets. Regulated instruments come with identity checks, investor eligibility rules and approved wallets, and Horizon builds those requirements into the lending process. Aave Labs reported more than $440 million in deposits in February 2026, but DefiLlama data shows about $254 million of collateral locked in Horizon on October 18 and $121 million in active loans, down from a peak of $421 million in January, so institutional demand has not yet grown in step with the bank’s thesis.

Protocol TVL, Oct 20, 2026 Market share Aave $17.97B ~35% Morpho $11.13B ~22% SparkLend (Sky) $5.08B ~10% DeFi lending total $51.52B 100% Source: DefiLlama; shares calculated against total lending TVL. 

What S&P Found Behind the $19.2 Billion Aave held about $19.2 billion in total value locked in September, roughly 37% of a decentralized lending market that S&P sizes at $52 billion, down from around $92 billion in October 2025. DefiLlama data puts the figure at about $17.97 billion on October 20, or close to 35% of a $51.5 billion lending market, after Aave’s deposits slipped from $19.68 billion on October 5. Cristina Polizu, managing director at S&P Global Ratings, said the protocol made DeFi “more open, programmable, and capital efficient.”

The report also points to the sector’s main weakness, since most borrowing on these platforms funds leverage through looping, a strategy where a user deposits an asset, borrows against it and redeposits the borrowed funds to multiply exposure, so the credit Aave creates today serves traders far more than businesses. Tokenized Treasuries and fund shares used as collateral would push part of that activity toward something closer to the secured lending banks already do. S&P adds that large depositors account for a big share of liquidity, which leaves lending conditions sensitive to the moves of a few participants.

From pilot to production

Aug 2025 – Aave Labs launches Horizon

Feb 2026 – Horizon deposits pass $440M

Jun 2026 – Citi Institute publishes 2030 forecast

Oct 13, 2026 – Citi collateral paper and S&P Aave report

Oct 20, 2026 – Citi Research note names Aave

Sources: Aave Labs, Citi, S&P Global. 

A Protocol Win Is Not a Token Win AAVE gives holders a vote on protocol parameters, and more institutional volume would lift protocol revenue, yet the share that reaches token holders depends on how governance decides to allocate that revenue. DefiLlama has recorded no treasury-funded AAVE buybacks since July, after about $42.9 million had reached holders that way, while the protocol earned roughly $5 million in revenue over the past 30 days and the token traded near $150 on October 20, about 10% lower than a week earlier. Banks also have alternatives of their own: Citi runs Citi Token Services, which already moves client liquidity between its branches around the clock, and many institutions may prefer permissioned networks to public DeFi.

Where the Institutional Test Happens The next measurable signals are Horizon’s deposit figures and the list of tokenized assets Aave governance approves as collateral, since every new fund or bond token has to pass valuation, liquidity and transfer-restriction checks before institutions can borrow against it. Smart-contract bugs, oracle failures and forced liquidations in volatile markets remain the risks that risk committees will price first. Aave V3 already had one such incident in March 2026, when an oracle misconfiguration on Ethereum led to an $862,000 loss that was later returned, a reminder that a single pricing error can hit a lending market even when its core contracts hold.

Citi’s paper also warns that running separate digital and conventional collateral programs could fragment an institution’s inventory and erase the efficiency gains, and it advises asset managers, pension funds and insurers to check whether their providers can manage both kinds of holdings together. For Aave, that makes integration with custodians and existing collateral systems the practical hurdle, more than the size of the 2030 forecasts.

Alex is a financial markets journalist and co-founder of Millennial Media Group, and he's spent close to ten years trying to answer one stubborn question: what's really driving this? It started in 2016, when Bitcoin refused to make sense to him - and rather than shrug, he stayed with it until it did. That patience became his method. He's less interested in what an asset is doing today than in the plumbing behind it: how liquidity flows, where risk hides, what a chart is quietly telling you that the headline isn't. That lens eventually stretched well past crypto into traditional markets, because the same forces - fear, leverage, incentives, timing - show up everywhere once you know how to look. Most coverage, in his view, insults the reader by stopping at the surface. Price up, price down, moving on. He'd rather leave someone genuinely understanding a move than merely informed that it happened. His path into markets ran through a Tourism degree at New Bulgarian University - proof, maybe, that curiosity beats credentials. With more than 200 deep analyses and over 10,000 articles behind him, he still walks away from most trading days having learned something he didn't know that morning.

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Citi Research has released a report stating that it is no longer sufficient to view Aave solely as a crypto-native lending protocol. As tokenized assets, stablecoins, and institutional participation gradually integrate into mainstream finance, Aave is poised to be positioned as a decentralized collateral liquidity protocol. Projects including Aave V4, Horizon, and GHO all point to the intersection of collateral, liquidity, and financing. The report notes that if tokenization determines which assets enter on-chain ecosystems, and stablecoins become the default settlement base, Aave could help shape how these assets are financed, leveraged, used as collateral, and integrated into capital markets. Citi argues that as tokenization expands beyond stablecoins to money market funds, private credit, Treasuries, and even future equities, collateral circulation may eventually emerge as one of the most important use cases of tokenization. Aave provides a practical case study showing how tokenized assets can be used for collateralized borrowing, financing, and re-collateralization within the digital financial system, while also offering insights into the future of tokenized capital markets, securities financing, and even prime brokerage.

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Babylon Labs has introduced a governance proposal that would allow Bitcoin holders to borrow stablecoins through Aave without moving their BTC off the Bitcoin blockchain. If advanced, this initiative could expand Aave, a leading decentralized finance (DeFi) lending platform, by offering direct Bitcoin-backed lending without the need for wrapped tokens.

Taproot Vaults to Enable Native Bitcoin CollateralThe proposal, published on October 14, details an integration using Babylon’s Trustless Bitcoin Vaults (TBVs) to link native Bitcoin with Aave V4’s Ethereum-based system. Instead of relying on wrapped Bitcoin, users would lock their BTC in Taproot-enabled outputs directly on the Bitcoin network.

Once locked, a corresponding record would be reflected within Aave V4, permitting users to access stablecoin liquidity without bridging assets to Ethereum. The system employs two core elements: the Babylon Spoke, which manages borrowing against BTC, and the BTC Vault Swap Spoke, responsible for liquidations and settlements.

Because Aave’s lending pools require ERC-20 tokens as collateral, the integration generates a restricted accounting token to represent users’ Bitcoin vaults in Aave. However, this token cannot be traded or freely transferred like standard wrapped BTC assets.

Mini dictionary: Babylon Labs is a blockchain research and development company focused on expanding the utility of Bitcoin through innovations such as trustless staking vaults and decentralized finance integrations.

Babylon has promoted on-chain BTC utility before, notably with its staking infrastructure—since August 2024, it reports over 100,000 Bitcoin cumulatively staked in its vaults, signaling demand for advanced Bitcoin-based financial products.

Babylon Foundation, in its governance documents, indicated that its TBV system allows users to gain liquidity from Aave without forfeiting custody or relying on wrapped assets, offering a way to participate in DeFi while retaining native BTC ownership.

Governance and Security MechanismsAs the proposal moves past an initial community review, governance concerns have emerged over how emergency mechanisms will affect user access. On October 16, an Aave governance member questioned whether Babylon’s emergency settings could delay or prevent collateral withdrawals, despite the Bitcoin itself remaining secure in its Taproot vault.

Babylon engineer Aleksa Opacic clarified that these emergency stops would not move or release any BTC from vaults, but could temporarily suspend withdrawals, repayments, and liquidations to maintain platform stability during critical situations.

The system would rely on a four-of-seven multisignature governance group plus a separate three-of-five emergency guardian team. Contract upgrades would be subject to a five-day grace period, while emergency pauses could take effect immediately.

A Babylon engineer emphasized that while the native BTC collateral remains secure, emergency protocols might temporarily restrict access to borrowers during periods of volatility or risk assessment.

Security measures of this kind have drawn scrutiny within the DeFi space, as real-world incidents involving liquidations and collateral control underscore the importance of robust on-chain governance and transparency.

Revenue Sharing and Competitive LandscapeThe proposal also lays out a revenue-sharing model between Aave DAO and the Babylon Foundation. Under the plan, Aave would receive the first $500,000 in qualifying annual revenue from the Bitcoin-backed lending feature. Earnings above that threshold would be divided among Aave, Babylon, and token-purchase pools based on a sliding scale.

Annual RevenueAave ShareBabylon ShareToken Purchase AllocationUp to $500,000100%0%0%$500,000–$1,000,00060%30%10%Above $1,000,00050%25%25%As revenue grows, portions of these funds would be used to purchase AAVE and BABY tokens from the market. Still, the framework does not guarantee minimum demand for the product or required token acquisitions.

This development aligns with Aave’s ongoing expansion of version 4 of its lending protocol, as well as increased institutional and platform interest in direct Bitcoin-backed lending.

Competitor platforms like Strike also offer Bitcoin-secured loans, highlighting how different providers are balancing the need for liquidity with the risks tied to collateral liquidation. The outcome of Aave’s governance process will determine whether this integration proceeds to implementation.

Aave V4 now lets users on Circle’s Arc network borrow dollars against euros without selling the euros first.

The feature lives in a dedicated Forex spoke, where EURC can be posted as collateral to borrow USDC.

How the Forex spoke works Aave V4 went live on Arc around September 16, 2026. It launched with a lineup of assets that includes USDC, EURC, cirBTC, and WETH.

The protocol uses a hub-and-spoke design. On Arc, the hub is called the Core Liquidity Hub. The Forex spoke draws liquidity from that hub, so euro holders can tap the same pool of dollars everyone else uses.

The key detail is risk separation. In the Main spoke, EURC has a 0% collateral factor. Euro deposits there carry no borrowing power at all.

The Forex spoke is where EURC becomes useful collateral. A user who holds euro stablecoins can borrow USDC against them and keep their euro exposure intact.

Isolating this activity in its own spoke means any trouble with EURC collateral stays contained. The Main spoke does not inherit the currency risk.

The numbers so far Data from Aave Tracker and Aavescan as of October 15, 2026, paints a picture of a deep hub and a quiet new route.

The Arc Core hub held approximately $294 million in supplied liquidity. Around $143 million of that was USDC. Borrowing in the Core hub stood at roughly $110 million.

The Forex spoke had about $68,000 supplied and about $32,000 borrowed.

The base borrow rate for the euro stablecoin is around 0.44%.

EURC is capped at 10M in the Forex spoke, a conservative limit set because secondary liquidity for the asset is limited. If liquidations ever need to happen, thin secondary markets can make unwinding positions harder, so a smaller ceiling limits the potential damage.

Why Arc, and why now Arc is Circle’s own network, and Circle issues both USDC and EURC.

The network also comes with an unusual roster of validators. BlackRock, Visa, and Mastercard are among the institutional validators securing Arc.

Aave V4 itself targets stablecoin-native and institutional use cases.

What this means For Aave, the Forex spoke is as much a test of the V4 design as it is a product launch. The hub-and-spoke model is built to let the protocol add specialized markets without exposing the whole system to each new risk.

With roughly $294 million sitting in the Core hub and only about $68,000 supplied in the Forex spoke, there is plenty of room to grow.

The 10M EURC cap is the number to watch. If supply in the Forex spoke starts approaching it, governance will face a decision about whether secondary liquidity has deepened enough to raise the limit.

A base rate around 0.44% for EURC reflects light demand, and any meaningful jump would suggest real usage is picking up.

Disclosure: This article was edited by Estefano Gomez. For more information on how we create and review content, see our Editorial Policy.

Babylon advances native Bitcoin lending proposal on Aave V4Latest NewsPublishedOct 15, 2026

Babylon’s proposal to bring native Bitcoin collateral to Aave V4 has entered a new governance stage, but further votes and security reviews remain before launch.

Bitcoin-focused developer Babylon Labs has submitted a proposal to let users borrow stablecoins on Aave against native Bitcoin (BTC).

Under the hood, users would lock their BTC in vaults on the Bitcoin network and borrow against it on Aave. A non-transferable token on Ethereum would represent the collateral, while the BTC itself would remain on its native blockchain without being bridged or wrapped.

The Wednesday proposal follows an initial submission on May 25 and a preliminary community vote that passed on June 10, according to Babylon Labs.

Under the proposal, Aave DAO would receive the first $500,000 in qualifying annual revenue generated by the integration.

Aave already supports loans against tokenized Bitcoin through tokens such as Wrapped Bitcoin (WBTC) and Coinbase Wrapped Bitcoin (cbBTC). Wrapped tokens rely on custodians to hold the underlying Bitcoin, introducing counterparty risks.

As of Thursday, the proposal remains at the Aave Request for Comment (ARFC) stage, where it faces community feedback and risk analysis.

If community consensus is reached, it can proceed to a three-day offchain Snapshot vote, which requires at least 320,000 AAVE-equivalent votes in favor before advancing to a formal onchain vote, according to Aave’s governance rules.

The onchain vote must meet quorum and approval requirements.

Cointelegraph is committed to independent, transparent journalism. This news article is produced in accordance with Cointelegraph’s Editorial Policy and aims to provide accurate and timely information. Readers are encouraged to verify information independently.

Babylon Labs has submitted a new governance proposal on October 14, 2026, to allow Bitcoin holders to borrow stablecoins through Aave V4 without selling their BTC, moving their coins to another blockchain, or handing them to a custodian.

Summary

Babylon submitted an Aave V4 proposal allowing Bitcoin holders to borrow stablecoins against native BTC.
Users would lock Bitcoin directly on its blockchain without depositing coins with third party custodians.
Aave DAO would receive the first $500,000 in annual qualifying revenue under the proposed agreement.
The integration requires further governance approval, finalized risk settings, and security checks before any launch.
Babylon proposes two dedicated Aave V4 components to manage Bitcoin collateral, borrowing, and liquidation procedures.

Babylon Labs published the proposal on Aave’s governance forum, advancing an integration first discussed in May. The plan would introduce two dedicated components for Bitcoin backed borrowing and loan liquidations. The integration still requires community approval, finalized lending risk settings, and further security checks before launch.

Babylon proposes Bitcoin lending without wrapping BTC
The proposal introduces Babylon’s Trustless Bitcoin Vaults technology to Aave V4, the latest version of the decentralized lending protocol.

Under the proposed system, Bitcoin holders would deposit BTC into special vaults operating directly on the Bitcoin blockchain. Their coins would remain locked on Bitcoin while supporting loans issued through Aave.

Borrowers could then access stablecoins against the value of their deposited Bitcoin, subject to the lending rules and collateral requirements eventually approved by Aave governance.

The process differs from Aave’s existing Bitcoin lending arrangements, which support assets such as Wrapped Bitcoin (WBTC) and Coinbase Wrapped Bitcoin (cbBTC).

Wrapped Bitcoin products are tokens issued on another blockchain to represent BTC held through a separate arrangement. Their ownership and custody structures depend on the product involved.

Babylon proposes avoiding that structure by keeping the original BTC on Bitcoin throughout the loan.

The technology uses Bitcoin’s Taproot system to restrict how deposited coins can move. Transactions involving the vault must satisfy predetermined conditions before the locked BTC can be released.

Babylon’s proposal describes the process as “without transferring custody to any trusted third party.” Although the coins would remain on Bitcoin, Aave needs a way to recognize the collateral within its Ethereum based lending system.

Developers therefore propose a restricted ERC-20 accounting token representing each vault’s BTC value. The token would exist solely inside the integration. Users could not freely transfer, trade, or hold it outside the designated contracts.

Babylon specifies that the accounting token would represent locked BTC on a one to one basis. Its supply would increase when a vault becomes active and decrease when collateral leaves the lending position.

The earlier launch of Babylon’s Bitcoin vault technology introduced the protocol’s approach to using native BTC in decentralized finance without conventional custodial bridges.

Aave V4 would introduce two Bitcoin lending components
Babylon proposes creating two new components within Aave V4, known as Spokes.

The first, called the Babylon Spoke, would allow users to borrow supported assets against native Bitcoin collateral. The second, called the BTC Vault Swap Spoke, would handle a more complicated part of Bitcoin lending: liquidations.

A liquidation occurs when a borrower’s collateral value falls too far relative to the outstanding loan. The lending system can close some or all of the position to protect the funds borrowed from the protocol.

Traditional Aave liquidations generally involve assets already available on the same blockchain. Babylon’s proposed arrangement has an additional requirement because the underlying collateral sits on Bitcoin, while borrowing takes place through Aave.

According to the proposal, redeeming a Bitcoin vault can take several days because transactions must pass through a challenge period.

The BTC Vault Swap Spoke would allow liquidators to receive wrapped Bitcoin promptly while designated participants complete the underlying Bitcoin settlement.

WBTC is the initial wrapped asset proposed for that process.

The documents explain that the liquidation system would process individual Bitcoin vaults. A borrower holding several vaults could specify the order in which they would be used if liquidation became necessary.

Aave DAO would control the lending parameters, including borrowing limits, collateral requirements, interest rate settings and liquidation rules. 

Risk service providers would supply the proposed settings for the two components. The governance forum discussion received support from Aave founder Stani Kulechov, who described native Bitcoin as an important potential source of lending collateral.

He welcomed the plan and supported using Aave V4’s dedicated architecture for the integration. The development follows earlier reporting on Babylon’s $15 million investment from a16z, which described the company’s plans to expand from Bitcoin staking into lending services.

Aave DAO could receive the first $500,000 in annual fees
Babylon’s proposal includes a revenue sharing arrangement between Aave DAO and the Babylon Foundation.

Under the proposed terms, Aave DAO would receive all of the first $500,000 in qualifying annual revenue generated by the integration. The qualifying revenue would come from specified protocol fees, including Aave’s liquidity fee on borrowing interest and fees collected through liquidation activities.

The arrangement would not apply to every dollar of interest paid by borrowers. After the first $500,000, revenue would be distributed according to several annual bands.

For qualifying revenue between $500,000 and $2 million, Aave DAO would receive 78%, Babylon would receive 18%, and 4% would go toward token purchases.

Higher revenue bands would provide different distributions. At annual qualifying revenue above $6 million, the proposed allocations would be 61.5% for Aave DAO, 31.5% for Babylon, and 7% for token purchases.

The token purchase allocation would fund open market purchases of AAVE and BABY, with 85% directed toward AAVE and 15% toward BABY. Purchased tokens would be divided equally between Aave DAO and Babylon Foundation.

These figures describe a proposed revenue formula, not projected earnings. Babylon has not guaranteed that the integration would generate enough activity to reach any of the thresholds.

In the governance document, Babylon reported that its existing Bitcoin staking protocol had activated more than 100,000 BTC cumulatively since August 2024.

The company listed approximately 40,772 BTC as currently staked when the proposal was prepared, with an estimated value of $3.37 billion.

Those figures relate to Babylon’s existing staking activities and do not represent Bitcoin already deposited into the proposed Aave lending integration.

The expansion of Babylon’s Bitcoin staking services through Kraken previously introduced another route for eligible customers to participate in Bitcoin based network security.

Staking and the proposed lending integration are separate activities with different reward arrangements and financial risks.

Bitcoin lending proposal needs more votes and security reviews
The October 14 submission is an Aave Request for Comment, meaning community members and risk specialists can review and discuss the plan.

Babylon initially introduced the integration through a Temperature Check proposal on May 25.

That preliminary proposal passed a community vote in June, allowing developers to prepare the more detailed October submission.

The current stage does not authorize the integration to launch.

According to Aave’s governance rules, a proposal advancing from the discussion stage can move to an offchain Snapshot vote before reaching formal onchain governance.

For the relevant Snapshot process, the proposal requires at least 320,000 AAVE equivalent votes in support. The final onchain vote must satisfy its own participation and approval requirements.

Babylon has not announced when those votes will take place.

The proposal describes security reviews conducted across five areas: Bitcoin vaults, proof generation, smart contracts, web services and the cryptographic system supporting vault settlements.

Six security firms participated in the audit work, including Coinspect, Sherlock, Zellic, ABDK, ZK Security and Runtime Verification.

Babylon states that each component received at least two independent reviews. Runtime Verification performed formal verification work on the smart contracts.

The company is now conducting another review of finalized changes with Coinspect, ABDK and Zellic before any mainnet deployment.

Babylon has committed to publishing the follow up reports when that work is completed.

The next formal steps listed in the October 14 proposal are community feedback and risk analysis, a possible Snapshot vote, and an Aave Improvement Proposal containing the complete risk settings for final onchain approval.

Babylon Labs is pushing forward a plan to let people borrow on Aave V4 using Bitcoin that never leaves the Bitcoin network.

The pitch is simple. Your BTC stays put, you borrow against it, and nobody has to hold your coins for you.

The catch, as with most things in DeFi governance, is that the paperwork isn’t finished. Risk parameters still need to be set, and more Aave DAO votes are required before anything goes live on mainnet.

How the setup actually works
The proposal is built on Babylon’s Trustless Bitcoin Vaults protocol, or TBV. Instead of wrapping BTC into a token on another chain, TBV locks the coins in self-custodial Taproot UTXOs on Bitcoin itself.

Think of it as a safe deposit box with programmable rules. The box sits on Bitcoin, and the rules decide when the contents can move.

Those rules are enforced through Taproot scripts and zero-knowledge proofs. Put plainly, cryptography plays the role a custodian normally would, and no third party ever holds the keys.

On the Aave side, deposits show up through an internal accounting unit called vaultBTC. It acts as a verifiable record of the BTC sitting in vaults, which Aave can then treat as collateral.

The integration leans on Aave V4’s modular design, which organizes markets into components called spokes. Babylon’s plan adds two of them.

The first is the Babylon Core Lending Spoke. This is where borrowers would post vault-backed BTC and take out assets such as USDC, USDT and WBTC.

The second is the BTC Vault Swap Spoke. Its job is to handle the messy part of lending: liquidations.

The WBTC twist in liquidations
Every lending market lives or dies by its liquidations. When a loan’s collateral falls below a safe threshold, outside parties called liquidators step in, repay the debt and collect the collateral at a discount.

That works smoothly when the collateral is a token sitting on the same chain. It gets awkward when the collateral is locked BTC on an entirely different network.

Babylon’s answer is to keep the collateral on Bitcoin while settling liquidations in WBTC. Through the BTC Vault Swap Spoke, liquidators would receive WBTC immediately rather than waiting on native BTC to move.

So liquidators get a familiar asset they can use right away on Ethereum. Borrowers, meanwhile, never had to wrap anything going in.

The design keeps liquidations permissionless, meaning anyone can act as a liquidator. Babylon has published documentation on the liquidation model in its developer docs.

Importantly, control over risk settings stays with the Aave DAO. Babylon builds the plumbing, but tokenholders decide how much can be borrowed and when positions get closed out.

A timeline measured in governance phases
Babylon and Aave first announced their partnership on December 3, 2025. The idea moved into Aave’s formal process with a DAO temperature check that began on May 25, 2026.

A temperature check is Aave’s version of a show of hands. It gauges interest before a proposal moves into the heavier ARFC and AIP stages, which are the detailed request-for-comment and final on-chain vote phases.

Public testnet deployment for native BTC-backed borrowing was active by October 2026. Around the same time, HashKey Cloud’s integration of TBV for institutional clients was confirmed on October 7, 2026.

That institutional piece matters. Custody-wary funds have often been the loudest critics of wrapped Bitcoin, so a trust-minimized route may appeal to exactly that crowd.

Still, testnet is testnet. Real money hasn’t touched this design yet, and the remaining ARFC and AIP phases are where proposals tend to get picked apart line by line.

Why this matters for Bitcoin in DeFi
Bitcoin has always had an awkward relationship with DeFi. It’s the largest crypto asset, yet using it in lending markets has usually meant wrapping it and trusting someone to hold the real coins.

That tradeoff has kept plenty of long-term holders on the sidelines. For a group whose motto is roughly “not your keys, not your coins,” handing BTC to a custodian is a tough sell.

Babylon’s model tries to remove that objection entirely. If it works as described, holders could tap lending markets without ever giving up custody.

There’s also an interesting second-order effect on Aave itself. The protocol holds one of its largest token supplies in WBTC, but borrow demand for that WBTC has historically lagged.

In other words, a lot of WBTC sits in Aave’s pools doing very little. Since liquidators in Babylon’s design get paid in WBTC and borrowers can take out WBTC, the integration could potentially put more of that idle supply to work.

What to watch
The first thing to track is the risk parameters. Loan-to-value ratios, liquidation thresholds and supply caps will determine whether this is a niche experiment or a serious Bitcoin borrowing venue.

Conservative settings would limit early risk but also limit appeal. Aggressive ones would attract borrowers while putting more weight on the untested liquidation path.

The second is how the WBTC settlement holds up under stress. A design that pays liquidators instantly needs enough liquidity behind it during a sharp BTC drawdown, which is precisely when everyone wants out at once.

The third is competition. Wrapped Bitcoin products have long dominated BTC collateral in DeFi, and a credible native alternative on the largest lending protocol would put pressure on custodial models to justify their trust assumptions.

For BTC holders, the appeal is clear: borrowing power without surrendering custody. For Aave, it’s a shot at drawing in a huge pool of capital that has mostly stayed on the sidelines. Whether both sides get what they want now depends on a few more rounds of DAO voting.

Disclosure: This article was edited by Estefano Gomez. For more information on how we create and review content, see our Editorial Policy.

OpenAI is holding preliminary discussions to buy Trail of Bits, a cybersecurity and security-research company that specializes in identifying and fixing vulnerabilities in open-source software, The Information reported Tuesday, citing people familiar with the matter.

The talks come as OpenAI seeks to develop a substantial cybersecurity business. The potential transaction’s value is unknown, and the discussions are ongoing and may not result in a deal, the people said.

Based in New York, Trail of Bits provides security audits, adversarial testing, vulnerability discovery and security engineering tools. It examines software for exploitable weaknesses and works with developers to fix them, particularly in widely used open-source projects.

The firm is also known in the crypto industry for auditing protocols and projects such as Uniswap, Aave and Worldcoin.

The two companies launched Patch the Planet in June to use AI to find open-source software vulnerabilities, have security experts review the results and help develop and publicly release fixes. Trail of Bits has also applied OpenAI security-oriented models, including Codex, to speed up vulnerability remediation.

Buying the firm would give OpenAI access to experienced security researchers, established audit capabilities and expertise in open-source security response, supporting its efforts to expand its cybersecurity business and address threats enabled by AI.

Disclosure: This article was edited by Diego Almada Lopez. For more information on how we create and review content, see our Editorial Policy.

Apps can embed variable-rate stablecoin lending and crypto-backed loans, while borrowers remain subject to the underlying protocols’ liquidation rules.

Apps can embed variable-rate stablecoin lending and crypto-backed loans, while borrowers remain subject to the underlying protocols’ liquidation rules.

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