Aave proposes Bitcoin collateralized lending for institutions

Aave Labs has proposed a new institutional lending model for Aave V4 that allows institutions to borrow stablecoins using Bitcoin held by Anchorage Digital as collateral without moving the assets on-chain.

Under the proposed ‘Custodied Collateral Lending: Aave V4 Isolated Hub & Spoke’ framework, Bitcoin remains in the custody of Anchorage Digital. Instead of transferring the actual assets, a non-transferable ‘Custodied Collateral Token’ (CoCT) is issued to represent the custodial balance on-chain. This mechanism is supported by Chainlink’s ‘CustodySync’ technology, which synchronizes Anchorage’s custody management system with Aave’s on-chain state by issuing or burning CoCTs based on real-time balance changes.

The proposal utilizes an isolated ‘hub and spoke’ market structure to prevent risk contagion from other Aave markets. Unlike standard automated on-chain liquidations, if a liquidation event occurs, Anchorage Digital would sell the Bitcoin via over-the-counter (OTC) markets to settle the debt.

While the proposal aims to lower entry barriers for institutional investors by maintaining regulatory compliance and security, some participants have raised concerns regarding potential delays in off-chain liquidations and the heavy reliance on oracle synchronization and third-party execution speed.