Trustless Bitcoin Vaults FAQ

Babylon general

Has any of this been audited?

Yes. TBV has undergone independent security reviews across the full system, including its Solidity smart contracts, Aave v4 integration, BTCVault, zero-knowledge provers and circuits, web services, and BABE cryptographic components.

Independent security engagements have involved Coinspect, Sherlock, Zellic, ABDK, ZKSecurity, and Runtime Verification. Findings from these reviews are handled through Babylon Labs' security and release processes.

Security is a top priority at Babylon and a continuous commitment throughout TBV's development. We plan to commission additional independent audits as the protocol evolves and expand security coverage across its components. Babylon already maintains a public bug bounty program, and we plan to include TBV within its scope.

We welcome responsible disclosure from the security community. If you believe you have identified a security issue affecting TBV, please report it privately to [email protected] so our security team can investigate it promptly.

What is Babylon's track record?

Babylon launched the Bitcoin Staking Protocol on mainnet in April 2025. It has been the largest Bitcoin-based project by TVL, with assets staked above $7B at peak. TBV is the next protocol built on that same trustless infrastructure, to enable native Bitcoin as collateral.

Overview

What are Trustless Bitcoin Vaults (TBV)?

Babylon Trustless Bitcoin Vaults (TBV) let native Bitcoin be used as collateral on any chain and in any application, without wrapping, bridging, or intermediaries. TBV-integrated applications can use native Bitcoin collateral for lending, stablecoins, credit cards, derivatives, insurance, and other financial products.

How does TBV work?

A depositor locks native Bitcoin into a BTCVault in a UTXO on Bitcoin. After the vault is verified, the protocol creates a 1:1 collateral record representing that BTCVault on an integrated chain. Applications such as Aave v4 can recognize this collateral and allow borrowing against the underlying native Bitcoin.

What are the main benefits of using TBV to use my native Bitcoin as collateral?

There are a few notable benefits of TBV:

• Native collateral. You can borrow against native Bitcoin on the Bitcoin network. TBV does not require wrapping, bridging, or intermediaries, which allows you to retain title to your Bitcoin.
• Cryptographic verifiability. The protocol relies on Bitcoin Script, cryptographic proofs, and protocol rules rather than custodial intermediaries to enforce collateral conditions.
• Capital efficiency. TBV supports any applications, such as borrowing and lending, stablecoins, and various financial products. This programmability improves the capital efficiency of native Bitcoin collateral.

Why Babylon + Aave?

Babylon provides the native Bitcoin collateral infrastructure. Aave provides one of the largest lending protocols in DeFi, with over $10B liquidity in TVL. Together, the partnership allows Bitcoin holders to trustlessly borrow against their native Bitcoin.

Why are launch caps so small?

Mainnet is designed to roll out in phases. Initial BTCVault and borrowing caps are intentionally conservative to ensure the best and most secure experience, and may be adjusted over time as additional phases are introduced.

What is the roadmap beyond Aave?

Native Bitcoin-backed borrowing on Aave v4 is the first use case of TBV. In the near future, TBV-integrated applications can use native Bitcoin collateral for lending, BTC-backed stablecoins, credit cards, derivatives, insurance, options DEX, and other financial products.

Security, custody, and trust model

Who holds my Bitcoin?

Your own self-custodial BTCVault holds the Bitcoin. A BTCVault is a UTXO script on the Bitcoin chain that locks your Bitcoin. It makes sure that:

• You can unilaterally unlock and withdraw your Bitcoin anytime as long as doing so will not cause under-collateralization of your loan.
• No one can move your Bitcoin unless your position is liquidated under the integrated lending market's rules. In the Aave v4 integration, a liquidated BTCVault is either escrowed in a Liquidation Liquidity Provider (LLP) until an App Keeper redeems it on Bitcoin, or redeemed directly by an App Keeper. See Aave v4 integration.

Is my collateral segregated or pooled?

Your collateral is segregated. Each BTCVault belongs to a single Depositor and holds only that Depositor's Bitcoin. Funds are not pooled or commingled with those of other users.

Can my Bitcoin be rehypothecated?

No. Your Bitcoin remains locked inside your own BTCVault under predefined spending conditions. The protocol does not and cannot transfer custody of your Bitcoin to a lending pool or intermediary.

Is wrapped or bridged Bitcoin required?

No. TBV uses native Bitcoin as collateral. It does not require wrapped Bitcoin or bridges.

How is my native Bitcoin on Bitcoin used as collateral on Ethereum?

You lock native Bitcoin into a BTCVault on the Bitcoin chain. After the BTCVault is verified and activated, applications such as Aave v4 recognize that as collateral and can allow borrowing against the underlying Bitcoin while it remains locked on Bitcoin.

What enforces the rules?

The protocol's spending conditions are enforced through Bitcoin Script, zero-knowledge proofs checked through BABE, and a challenge mechanism that allows invalid redemption or liquidation claims to be disputed before Bitcoin is released. These mechanisms replace reliance on a trusted intermediary with cryptographic verification.

What happens if Babylon or my Vault Provider goes offline?

TBV is designed so that redemption and verification do not depend on Babylon remaining online. Independent protocol participants, including Universal Challengers, can dispute invalid claims. Depositors may also operate their own Vault Provider. There is also a Security Council that is available only as an emergency backstop for exceptional situations.

Is there counterparty credit risk?

TBV is designed so you do not rely on an intermediary to hold your Bitcoin. However, users remain exposed to risks associated with smart contracts, protocol implementation, price oracles, and the integrated lending application they choose to use.

What can Babylon do to my funds? What if Babylon disappears?

Babylon cannot unilaterally move, seize, or redeem your Bitcoin. Redemption and liquidation follow protocol-defined rules enforced through Bitcoin Script, cryptographic proofs, and the challenge process, not by any company.

Do I have to trust my Vault Provider?

No. A Vault Provider helps administer BTCVault creation and redemption, but it cannot spend your Bitcoin outside the protocol's predefined conditions. Universal Challengers can dispute invalid claims, and users may also choose to operate their own Vault Provider if they prefer.

What enforces correctness across two chains?

Cross-chain correctness is enforced through Bitcoin Script, zero-knowledge proofs checked through BABE, and a challenge period. Before Bitcoin is released from a BTCVault, the required proof is verified and participants have an opportunity to challenge any invalid claim. Read more in the BABE paper.

Who are the operators and how are they separated?

TBV separates responsibilities across different operator roles, each limited to specific functions:

• Vault Provider: An infrastructure operator appointed by the depositor to administer the vault's creation and process redemption.
• Universal Challenger: A global set of operators that monitor claims across every BTCVault, in every application, and challenge any that are invalid.
• App Keeper: Every integrated application appoints its own set of App Keepers. App Keepers hold both claim and challenge rights for that application's BTCVaults, such as the Arbitrageur in the Aave v4 integration.
• Security Council: An emergency backstop. By quorum, it can block payout on a specific BTCVault, but it cannot direct Bitcoin to any address. Protocol governance can pause Ethereum-side actions, including new redemptions. Pauses do not stop Bitcoin-side recovery paths that are already available.

See Protocol actors for the full role definitions.

Deposit and vaults

How does a vault work?

When you deposit native Bitcoin, it is locked into your own BTCVault. A pre-signed transaction graph defines the valid ways the BTCVault can be spent under the protocol rules. Once the vault is verified, TBV-integrated applications such as Aave v4 recognize the underlying Bitcoin as collateral.

What is fixed when a vault is created?

When a BTCVault is created, several properties are fixed for the lifetime of that vault, including:

• Who is authorized to redeem the Bitcoin
• The BTCVault being redeemed as a whole
• Which integrated application governs redemption rights
• Who is authorized to challenge invalid redemption claims

These properties cannot be changed after vault creation.

How long does vault creation take? Why does it take so long?

On testnet, a BTCVault becomes active about two hours after the deposit. That time is almost entirely spent on Bitcoin confirmations, as the protocol has to wait before the BTCVault can be activated (12 confirmations at roughly 10 minutes each). Once those confirmations are complete, the remaining protocol steps generally finish within several minutes.

This may not be something everyone is familiar with, as transaction confirmation on Bitcoin usually takes longer than on other networks. If you encounter any errors, please join our Discord to request a support ticket.

Why split Bitcoin into two vaults?

Each BTCVault is backed by a single Bitcoin UTXO and cannot be partially seized during liquidation. Splitting your collateral across multiple BTCVaults allows the protocol to liquidate only the vaults needed to restore the required health factor, instead of liquidating your entire position.

The application recommends an appropriate BTCVault split based on the current protocol parameters. The app dashboard will suggest this split automatically. See Liquidation risk for the detailed mechanism.

How do I change the vault order?

While your BTCVaults are "In Use", you can reorder them from the Collateral section of the application. During liquidation, BTCVaults are considered in the order you specify, beginning with the first vault in the list. Changing the order requires an Ethereum transaction. BTCVaults that are "Available" and not securing a borrowing position are not included in the liquidation order.

You cannot reorder vaults once your health factor is below 1.0, or while the Spoke is frozen.

What if vault creation stalls or expires?

If BTCVault creation does not complete successfully, the protocol provides recovery paths depending on where the process stopped.

• If the off-chain setup does not complete within approximately 24 hours, the BTCVault expires and the peg-in fee goes to the protocol treasury. The treasury reimburses not-at-fault depositors manually.
• If activation does not occur within approximately 48 hours after BTCVault creation, the fee is non-refundable, but your Bitcoin remains recoverable.

In both cases, you can recover your Bitcoin after the protocol timelock by signing with the original Bitcoin key, unless the PegIn transaction has already spent your deposit on Bitcoin. In that case a refund is no longer possible: redeem the BTCVault before its grace window closes, and the Vault Provider claims the Bitcoin and pays it to your payout address, minus its commission.

Why am I asked to download claimer artifacts?

Claimer artifacts enable the self-claim recovery path. If your Vault Provider becomes unavailable during redemption, these files allow you to complete the redemption process yourself using the protocol's self-claim procedure. The WOTS (Winternitz One-Time Signature) keys used for self-claim are re-derived from your Bitcoin wallet, so there is no separate WOTS key file to store.

Store these files securely alongside your wallet recovery phrase. If they are lost and your Vault Provider is also unavailable, recovery may require assistance through the protocol's emergency procedures and may require Security Council escalation. See Withdraw & redeem for the self-claim path.

Does every spend get pre-signed before my Bitcoin moves?

Yes. During BTCVault creation, the protocol establishes the complete pre-signed Bitcoin transaction graph before your Bitcoin is deposited into the vault. These pre-signed transactions define every valid spending path permitted by the protocol.

Borrowing and redemption

What can I borrow, and where?

Through the current TBV integration with Aave v4, you can use your native Bitcoin collateral to borrow ERC-20 assets supported by that Aave market.

How do I get my Bitcoin back? How long does it take?

You can redeem your Bitcoin after repaying enough debt to satisfy the protocol's collateral requirements. Once redemption begins, the protocol enters a challenge period of approximately three days. If no valid challenge is raised during that period, your Bitcoin is released to the Bitcoin address associated with your BTCVault.

How does redemption work?

When you initiate redemption, the protocol generates the required proof that the redemption conditions have been satisfied. A claim is then submitted on Bitcoin, followed by a challenge period during which invalid claims can be disputed. If the claim is not successfully challenged, the Bitcoin is released according to the BTCVault's predefined spending conditions.

How is the interest rate set?

Borrowing interest rates are determined by Aave v4, and you can check the current rate on Aavescan.

Why does repayment ask for two wallet confirmations?

Repaying an ERC-20 debt involves two transactions:

• First, you approve the lending protocol to spend the repayment token.
• Second, you submit the transaction that repays the debt.

Can someone else repay my debt?

Yes. Another address can repay debt on your behalf, subject to the lending protocol's rules.

Why is my borrowing rate different?

There may be different situations where:

• The displayed rate is annual (APR), while interest accrues continuously.
• Small differences may also result from accrued interest between transactions or normal rounding when repaying outstanding debt.

Why does withdrawal take about 3 days?

Bitcoin cannot natively and directly verify Ethereum state. Before Bitcoin can be released, a zero-knowledge proof, checked through BABE, verifies the Ethereum redemption event on Bitcoin, together with a challenge period of approximately three days. This allows invalid redemption claims to be disputed before settlement is finalized.

Why is Withdraw disabled for one of my vaults?

A BTCVault cannot be withdrawn if removing it would cause your remaining borrowing position to fall below the required collateral threshold. The depositor must repay sufficient debt first, and the vault will then become eligible for withdrawal.

Why does the dashboard still show Pending Withdraw?

The Ethereum transaction only initiates redemption. After it is confirmed, the protocol runs the Bitcoin side of the claim, and the challenge window starts before Bitcoin is released. During this time, the dashboard continues to display "Pending Withdraw" for the full duration, which is roughly 3 days from the withdrawal request to the actual Bitcoin arrival in your wallet on Bitcoin.

The Vault Provider is unresponsive during redemption. What now?

If your Vault Provider becomes unavailable during redemption, you can use the protocol's self-claim process, provided you retained the claimer artifacts created during BTCVault setup. This allows you to complete redemption independently without relying on the Vault Provider. See Withdraw & redeem for the full self-claim walkthrough.

Where does the borrowing happen and who sets the terms?

Borrowing takes place through the current Aave v4 integration, and you can check the current terms on Aavescan.

Why is there a 3-day challenge window, and can it be shortened?

TBV uses a zero-knowledge proof, checked through BABE, plus a ~72-hour challenge period to verify an Ethereum redemption event on Bitcoin, so any Vault Keeper can dispute an invalid claim before Bitcoin is released. It is a fixed security parameter tied to the fraud-proof design, which cannot be shortened per user.

What happens to my position if Aave DAO freezes or pauses the Spoke?

If Aave DAO pauses the Spoke, actions such as borrowing, repaying, withdrawing, and liquidation are blocked. If it freezes the Spoke, existing positions can still repay, withdraw, or be liquidated, but new borrowing or collateral cannot be added.

Liquidation

What is the health factor and what number is safe?

The health factor measures how close your borrowing position is to liquidation. It compares the risk-adjusted value of your collateral with your outstanding debt:

Health Factor = (Collateral Value * Collateral Factor) / Debt Value

A position becomes eligible for liquidation when its health factor drops below 1.0.

Health factor	What it means
Above 1.5	Comfortable margin
1.2 to 1.5	Approaching risk
1.0 to 1.2	High risk
Below 1.0	Liquidatable

The ranges shown in the application (for example, above 1.5 or between 1.2 and 1.5) are informational guidance only. The protocol enforces only the liquidation threshold.

What happens during liquidation?

If your position falls below the liquidation threshold defined by the lending market, a liquidator repays part or all of your debt and the protocol seizes enough Bitcoin collateral to cover it. In return, the protocol transfers enough BTCVaults to satisfy the liquidation according to the configured vault order. Because each BTCVault corresponds to a single Bitcoin UTXO, liquidation always transfers the whole BTCVault rather than fractions of a vault.

If multiple BTCVaults secure your position, only the vaults required for the liquidation are transferred. Any remaining BTCVaults continue securing your position if debt remains outstanding.

What is the fairness payment?

Because a BTCVault is indivisible, a liquidation may seize slightly more Bitcoin than needed. The fairness mechanism compensates you for the difference: it either reduces your remaining debt or, if there is surplus left after your debt is covered, pays it to you in WBTC.

The surplus is not paid at its raw BTC value. It is discounted using the ratio of debt liquidated to collateral liquidated. For example, if $24,000 of debt is cleared for $25,000 of seized collateral, each dollar of over-seized collateral is valued at about $0.96. See Aave v4 integration for details.

Who can liquidate my position, and is it discretionary?

Liquidation is rule-based, not discretionary. If your position reaches the liquidation threshold defined by the lending market, any address can trigger liquidation. In the Aave v4 integration there are two paths:

• LLP-routed liquidation (permissionless): The liquidator repays the debt and receives instant settlement (WBTC at launch) from a Liquidation Liquidity Provider (LLP). The seized BTCVault is escrowed in the LLP until an App Keeper acquires it and redeems it on Bitcoin.
• Direct-redemption liquidation (permissioned): A registered App Keeper repays the debt and redeems the seized BTCVault directly to its Bitcoin redeem key.

Neither Babylon nor any other party decides when a position is liquidated.

How does partial liquidation work on an asset that has no denominations?

Each BTCVault is a single, indivisible Bitcoin UTXO, so liquidation always seizes whole BTCVaults, never a fraction. To support more granular liquidation, users may split their collateral across multiple BTCVaults. During liquidation, the protocol transfers only the BTCVaults required to restore the target health factor, following the user-defined vault order. Any over-seizure resulting from indivisible BTCVaults is handled through the fairness payment mechanism.

What happens if I get liquidated?

If your position is liquidated, a liquidator repays part or all of your debt and the required BTCVaults are seized according to the protocol rules and your vault order. Seized BTCVaults are either escrowed in an LLP until an App Keeper redeems them on Bitcoin, or redeemed directly by an App Keeper. A permissionless liquidator receives WBTC from the LLP, not the BTCVault. Any surplus value comes back to you through the fairness payment, discounted by the ratio of debt liquidated to collateral liquidated (see What is the fairness payment?).

Wallets and setup

Which wallets do I need?

You need two wallets: a Bitcoin wallet and an Ethereum wallet. To use the testnet app, connect them to Bitcoin Signet and Ethereum Sepolia respectively.

• The Bitcoin wallet must produce Taproot (P2TR) addresses and support PSBT signing, message signing (BIP-322 or ECDSA), and deriveContextHash, which derives the vault's secrets.
• The Ethereum wallet must be compatible with WalletConnect or be an injected browser wallet supported by the testnet app.

UniSat is a supported Bitcoin wallet; other wallets must also be supported by the app. For the current supported wallets, networks, and faucet links, see Setup.

Why do I need a Taproot address?

TBV locks Bitcoin into Taproot (P2TR) outputs. To create a BTCVault, your Bitcoin wallet must be able to generate Taproot addresses. Bitcoin address types maintain separate UTXOs, so funds held on other address types are not automatically available through a Taproot address.

I cannot connect my wallets. What should I do?

Check the following:

• Your Bitcoin wallet is set to Signet, not mainnet.
• Your Ethereum wallet is on Sepolia, not another network.
• Both wallets are unlocked before opening the testnet app.
• If several Bitcoin extensions are installed, disable the ones not in use so the app detects the correct one.
• Refresh the page once and reconnect the desired wallets.

If you are using a multisig wallet (for example, Safe through WalletConnect), the signing flow may not be supported. A browser extension wallet may be required.

Why is my balance not showing?

You may be experiencing one of the following issues:

• The connected wallet address differs from the one holding the funds. Try to reconnect with the correct address.
• The Signet faucet transaction is not yet confirmed. Bitcoin confirmations are required before the balance becomes spendable. This typically takes a few minutes on Signet.

What if I lose my claimer artifacts?

If your Vault Provider remains available, losing your claimer artifacts does not immediately affect normal redemption. However, you would no longer be able to use the self-claim recovery path. If you lose your claimer artifacts and your Vault Provider is also unavailable, recovery may require the Security Council. Visit the Security Council section to learn more.

What if I refresh the page while signing?

The deposit flow is designed to resume after a page refresh. Reopen the dashboard with the same Bitcoin and Ethereum wallets used for the vault. Refresh once and look for any pending deposit or existing vault on the dashboard. Do not switch to a different Bitcoin address for a deposit already in progress.

If the flow does not resume, contact support on Discord with screenshots, wallet addresses, and any transaction hashes.

What if I lose my Bitcoin key?

Your BTCVault is secured by your Bitcoin private key. If you permanently lose that key, you lose access to the Bitcoin in the same way you would lose access to any self-custodial Bitcoin wallet.

Back up your wallet seed phrase, along with your claimer artifacts, at vault creation so you can recover independently.

Getting started

Where can I get more information about native Bitcoin-backed borrowing with Aave v4 and public testnet?

For technical documentation, see What is TBV.

To try native Bitcoin-backed borrowing powered by TBV with Aave v4 on testnet, visit our app: https://btc-vaults.testnet.babylonlabs.io/

We welcome your feedback. Mainnet is targeted for Q4 2026.

What signing capability do I need?

Depositors need a Bitcoin wallet that supports Taproot (P2TR) addresses, PSBT signing, message signing (BIP-322 or ECDSA), and deriveContextHash, together with an Ethereum wallet.

Operators such as Vault Providers and App Keepers require Bitcoin and Ethereum signing infrastructure capable of participating in the protocol's pre-signing process.

How many user interactions does a deposit take?

Users need to actively interact with their wallets during three sessions. Usually it takes between 6 and 10 device clicks:

• Start the deposit: Sign the transactions to register the deposit, and link your Bitcoin and Ethereum wallets.
• After Bitcoin confirmations: Return to sign the payout and recovery transactions once the required Bitcoin confirmations have been reached.
• Activate the vault: Retrieve the deposit secret, sign the activation transaction, and complete the vault activation. Activation makes the vault usable as collateral, even before the PegIn transaction confirms on Bitcoin.

Between these signing sessions, the protocol waits for Bitcoin confirmations and Vault Provider verification. Users can safely close the application during these waiting periods and return later to continue the deposit.

Can my users use a hardware wallet?

Yes, with a supported device. PSBT and message signing are not enough: the device must also support deriveContextHash. The supported hardware integrations are:

• Ledger with the dedicated Babylon Vault app, once it is available in Ledger Live. The standard Ledger Bitcoin app and the Babylon BTC Staking app cannot be used for deposits.
• Keystone, signing air-gapped over QR codes.

Trezor is not supported.