Babylon Labs introduces trustless Bitcoin collateral for Ethereum
Bitcoin infrastructure firm Babylon Labs claims to have created a system enabling native Bitcoin (BTC) to serve as trustless collateral for borrowing on Ethereum.
In a recent X post, co-founder David Tse announced a proof-of-concept leveraging BitVM3, a Bitcoin smart contract verification framework. The system locks BTC in individual vaults and verifies Ethereum smart contract states directly on the Bitcoin blockchain, without using custodians or traditional bridges.
How Babylon’s system works
According to Babylon’s August white paper, users deposit Bitcoin into “trustless vaults,” secured via cryptographic proofs. On Ethereum, a smart contract interacts with a Bitcoin light client to validate vault states, enabling borrowing and lending operations.
An early version of Babylon’s tokenized collateral, called VaultBTC, is already deployed on Morpho, an Ethereum-based lending protocol. However, testing is still underway, and total market liquidity remains minimal at around $14 in USDC.
The trustless claim under scrutiny
While Bitcoin storage and verification appear trustless, the liquidation mechanism introduces trusted elements. Babylon’s white paper reveals that vault liquidations depend on whitelisted liquidators — entities authorized to monitor prices and trigger liquidations.
This reliance creates trust assumptions, as liquidators must act honestly for the system to function correctly. Furthermore, the process depends on price oracles like Band Protocol and Pyth Network, which can be vulnerable to delays or inaccuracies.
What sets it apart from Wrapped Bitcoin
Babylon’s model aims to overcome the custodial risk found in Wrapped Bitcoin (WBTC), where a centralized entity holds the BTC backing the token. Instead, Babylon’s cryptographic vaults allow users to define spending conditions in advance, theoretically eliminating the need for intermediaries.
Still, despite the innovation, Babylon’s “trustless” claim remains partial — limited by external dependencies on liquidators and oracles.
As the white paper puts it, “Trustless vaults eliminate many, but not all, trust assumptions.”
