Babylon's Native Bitcoin Collateral Breakthrough

Yet 99.4% of its $1.4tn supply is idle capital, with only about 0.6% doing any productive work in DeFi. The issue is not demand. The issue is the price of access. To put Bitcoin to work in DeFi, holders have historically faced two options: hand custody to a centralized entity that rehypothecates the asset and pockets the spread, or wrap it – exchanging native BTC for a synthetic representation usable onchain. That introduces bridge risk, counterparty trust, and the accumulated attack surface that has made cross-chain infrastructure the single most exploited layer in crypto. Neither option is acceptable to a serious Bitcoin holder. Both are fundamentally at odds with why anyone holds Bitcoin in the first place.

From Bitcoin staking to collateral 

Babylon (BABY) Protocol is building the exit ramp from that dilemma. Fisher Yu, co-founder and a long-standing decentralization architect – whose earlier work building a distributed multimedia system was acquired and integrated by Dolby’s core – approached Bitcoin with the same founding instinct: cut the middleman, trust the code. The result is Trustless Bitcoin Vaults, the first infrastructure that allows native BTC to serve as DeFi collateral without ever leaving the holder's custody.

Bitcoin was not built for DeFi like Ethereum. That gap was, for a long time, treated as inevitable. Babylon's argument is that it was merely an infrastructure problem, and the team is now addressing it to close the gap.

Babylon’s first protocol iteration was a Bitcoin staking product – and for a period, it worked. It became the go-to infrastructure that drove the BTCfi narrative dominating 2024: inscriptions, onchain DeFi for Bitcoin and even memecoins, the first attempt to make the bellwether network's capital base productive. At its peak, the protocol held $7.1bn in staked Bitcoin.

For a moment, it looked like Bitcoin had found its yield primitive. But the protocol-funded incentives paid out to bootstrap liquidity eventually compressed with the overall market. Incentive-driven yield is structurally fragile, as the capital it attracts is mercenary. Mercenary capital exits the moment the next opportunity appears. Protocols like Lombard still rely on Babylon’s staking infrastructure to provide the Bitcoin yield they offer to the roughly $744mn in liquid BTC leveraging their protocol.

Retaining capital became a challenge. This weakened BTCfi primitive resilience and limited Bitcoin’s possible impact as its economic presence continues to grow.

Babylon’s pivot rests on a simple observation: collateral is the cornerstone of the financial system. The logical step was to rethink the model and evolve it as the infrastructure for Bitcoin to serve as native collateral. This makes holders able to borrow against their assets without transferring custody, without wrapping, and without any intermediary extracting rent from the middle. It allows Bitcoin capital to be productive in DeFi.

The staking chapter proved Babylon could bootstrap Bitcoin capital at scale. The collateral chapter is the question of whether it can expand the BTCfi model and tap into the most idle capital base in the crypto industry.

The BTCfi landscape 

Bitcoin's penetration in the DeFi ecosystem has always been a constraint story.

Of Bitcoin's $1.4tn market capitalization, roughly $16bn – just 1.1% of total supply – sits in wrapped BTC instruments across all forms. Of that, only $9.2bn reaches DeFi protocols as productive collateral, while the remainder is parked in bridges and custodial wrappers. The bellwether the entire crypto industry prices itself against only contributes about 0.6% of its supply to the lending infrastructure built around it.

The contrast with Ethereum is stark and deliberate. Roughly 31% of ETH's total supply is natively staked and productive at the validator level. Even stripping out liquid staking and restaking instruments – which dominate ETH collateral supply, letting holders earn staking yield while simultaneously posting the asset as collateral – and counting only native ETH supplied as collateral across Aave and EigenLayer, roughly 5% of native ETH supply is working inside the system ETH was built for.

The Bitcoin lending infrastructure that does exist is almost entirely built on wrapped proxies. Of the $9.2bn in BTC supplied across DeFi lending protocols, $5.13bn (about 56%) sits on Aave alone, predominantly in wrapped BTC (wBTC). Morpho captures another $1.9bn, or 20%, with an asset mix skewed toward cbBTC. This reflects Coinbase's aggressive push to establish its wrapped Bitcoin as the institutional standard following wBTC's custodial controversy. Compound and SparkLend account for most of the remainder. The entire landscape is, in effect, a wBTC and cbBTC duopoly sitting on top of two protocols, with governance over the underlying collateral held entirely by centralized issuers.

(Data compiled by Sandmark from lending protocols)

The one exception is Maple Finance. With $848mn in native BTC supplied as collateral, Maple is the only protocol currently doing native Bitcoin lending at any meaningful scale. It is also an institutional-only product, gated by KYC and counterparty agreements. The infrastructure for trustless, permissionless native BTC collateral does not yet exist at scale. That is precisely the gap Babylon is building into.

On Aave, BTC represents roughly 15% of total supplied assets – significant for the largest lending protocol in DeFi, but still a minority position in a collateral base dominated by ETH and stablecoins. Morpho runs hotter at about 42%, reflecting its curator-driven architecture and the aggressive deployment of cbBTC by institutional depositors. Maple is the outlier for the lending segment, with native BTC constituting 67% of total loans collateral supplied on the protocol. This is a direct consequence of building its product thesis around institutional-grade lending.

Even within the existing broken infrastructure – wrapped assets, custodial risk, no native BTC primitive – protocols are already allocating heavily to Bitcoin as collateral. The demand is there, and it is being expressed through the only tools currently available.

For Babylon, that is the strongest possible validation. They are not creating demand – they are building the infrastructure to satisfy demand that is already present and structurally underserved. Every percentage point of BTC concentration on those protocols is a future user of native BTC collateral if Babylon ships.

Babylon currently holds $3.7bn in Bitcoin under management – already 40% of the total BTC supplied across all DeFi lending protocols, before its collateral product has launched. In USD terms, the drawdown headline from the October 2025 peak of $7.1bn looks severe. But in BTC nominal supplied, the protocol printed an all-time high of 61,771 BTC by mid December 2025, and the nominal decline from peak to present is just 9.8%. The dollar TVL compression is almost entirely price action, not capital flight.

(Source: DefiLlama)

Babylon's stated target is 10% of Bitcoin's total supply backing onchain products, Fisher said to Sandmark – a threshold the protocol treats as the minimum for claiming success over the BTC collateral primitive. At current valuations, that is roughly $140bn, or three-quarters of total DeFi TVL across the industry.

While the target carries no temporal anchor, it is noteworthy that native Bitcoin collateral does not cannibalize existing DeFi supply. It heavily expands the base. Unlocking BTC pulls the industry's largest asset class into productive use natively for the first time, growing the total collateral base and pushing protocols TVL toward a structurally higher equilibrium. A rising tide lifting all boats.

Babylon's most immediate target is the 1% threshold – converting the roughly $16bn already sitting in wrapped BTC instruments across DeFi. Capital that revealed its intent by showing up, but accepted custodial and bridge risk because there was no alternative. Native collateral infrastructure gives it one.

Next in line, while Bitcoin’s Digital Assets Treasuries (DAT) are not the largest pool of idle BTC capital, they are the most institutionally legible one – named holders, known custody arrangements, board-level decisions. At roughly 5.5% of total BTC supply, they represent a concentrated and identifiable target for any infrastructure serious about institutional distribution.

Babylon's infrastructure is not built for a single customer archetype. The addressable market runs from Bitcoin holders seeking leverage on their assets, to, at the opposite end of the spectrum, committed self-sovereignty believers who have never been willing to hand custody to anyone – not because the yield was not attractive, but because the product that preserved their custody simply did not exist.

Trustless Bitcoin vaults

When a holder exchanges native BTC for cbBTC, wBTC, or any synthetic equivalent, they are not putting Bitcoin to work – they are trusting Coinbase, BitGo, or whichever custodian stands behind the wrapper to hold the underlying asset honestly, process redemptions faithfully, and not become the next bridge exploit headline – atop compounding trust requirements that serious Bitcoin holders have consistently, rationally, refused.

Trustless Bitcoin Vaults eliminate the stack entirely.

Under TBV, native BTC is locked in a vault created and controlled exclusively by the holder, segregated from other users' assets. It does not move to a custodian. The holder defines the parameters governing how the Bitcoin can be used – and those parameters are enforced by smart contracts on Ethereum that control settlement and collateral disposition. The proof that the BTC is genuinely locked on the Bitcoin chain is cryptographic: Babylon uses SNARKs to prove on-chain state, garbled circuits to compress that proof into a form Bitcoin Script can natively process, and Bitcoin's own primitives – hash locks, time locks, Taproot – to enforce the resulting ownership transitions. The counterparty is the code. The code is auditable, deterministic, and has no rehypothecation mandate.

For protocols integrating TBV, the Bitcoin-level cryptographic complexity is entirely abstracted. Babylon exposes an SDK, API, and tooling layer designed to plug into the frontends of custodians and exchanges. TBV runs silently in the back end while the user experience remains clean. The technical barrier to integration is Babylon's problem, not the protocol's.

The product surface TBV unlocks is not narrow. Native Bitcoin as programmable collateral opens Bitcoin-backed lending, Bitcoin-backed stablecoins, structured yield products, and onchain insurance premium harvesting – every primitive DeFi has built on ETH, now available to the largest and most liquid asset in the industry. The constraint was never Bitcoin's properties as collateral. It was the absence of infrastructure that honoured those properties while making the asset productive.

Babylon’s battleground

The more immediate competition, and the more immediate opportunity, sits in the CeFi prime brokerage layer, already positioned between institutional Bitcoin custody and DeFi liquidity. Anchorage's Atlas platform, Coinbase Prime, Galaxy Digital, and BitGo – the latter already serving as collateral custodian for Maple's BTC Yield product – have built the rails that institutional holders currently use to put BTC to work. The OCC has granted several of them non-traditional financial services provider status, a regulatory green light that has accelerated their intermediation of exactly the demand Babylon is targeting. These players are, simultaneously, Babylon's most credible near-term competitors and its most logical SDK distribution partners – prime brokers plugging Babylon's infrastructure into their existing institutional client base, sourcing onchain liquidity while retaining the custody relationship their clients demand.

Babylon has partnered with Aave to bootstrap liquidity – the deepest and most battle-tested lending protocol in DeFi, and the right venue to establish native BTC collateral as a credible primitive before the architecture scales elsewhere.

The launch borrowing rate is expected to sit below prevailing CeFi rates for comparable Bitcoin-backed credit, said Babylon's co-founder to Sandmark, and even structurally cheaper once you account for the fact that lending comes without expensing custody. The rate wedge against CeFi is the commercial argument. The custody preservation is the ideological one. Together, they address every objection a serious Bitcoin holder has ever raised against putting their BTC to work.

A share of the fee will flow to the lending pool as yield, and the remainder will be split between Aave and Babylon as protocol revenue – with Babylon reserving the right to layer an additional few basis points on top. At any meaningful scale of Bitcoin collateral, that fee stack becomes a significant revenue stream.

Aave V4 launched recently and is still operating under supply and borrow caps as it accumulates live security history. Babylon’s deployment is likely to enter once the infrastructure is battle-tested.

Risk curators are already engaged for the next layer: hedge fund-style strategies that use native BTC lending as the foundation for more structured yield products. The most compelling of those sits just beyond the initial launch. Selling covered calls against native Bitcoin collateral to harvest option premium is already deeply embedded in how large BTC holders manage their books – ETF operators in particular. They can tender BTC in-kind for IBIT shares and access deep listed options liquidity off the back of it.

Bringing that yield mechanic onchain natively, backed by TBV's trustless collateral infrastructure, is the logical next product surface.