
Babylon Labs Introduces Bitcoin as Trustless Collateral for Ethereum
Babylon Labs claims to have created a mechanism allowing native Bitcoin to be used trustlessly as collateral for Ethereum transactions.
Babylon Labs Claims Trustless Bitcoin System
Babylon Labs asserts that it has developed a mechanism using BitVM3 that enables the use of native Bitcoin as trustless collateral for borrowing on the Ethereum blockchain. However, aspects of its design raise concerns regarding trust assumptions.
In a post shared on X, David Tse, co-founder of Babylon Labs and a professor at Stanford University, mentioned that they have created a proof-of-concept allowing Bitcoin (BTC) to be utilized as trustless collateral for the first time on the Ethereum platform.
This announcement followed the publication of a white paper detailing Babylon’s Bitcoin trustless vault system, which leverages the Bitcoin smart contract verification system, BitVM3. It locks BTC in individual vaults, where the process of withdrawals relies on cryptographic proofs regarding the state of external smart contracts, verified on Bitcoin.
This setup ensures users can lock their Bitcoin and transition it to Ethereum without needing a centralized custodian. A smart contract on Ethereum checks the BTC vault through a Bitcoin light client before recognizing the collateral.
An experimental token has been launched on the Morpho lending protocol, yet it remains in testing, with only $14 liquidity accounted for in USDC. Tse described this VaultBTC as a non-fungible asset that facilitates trustless withdrawals for depositors and liquidators alike.
Evaluation of Trust
Though certain components of the system are indeed trustless, other elements still rely on trust. As outlined in the white paper, the liquidations of Babylon’s Bitcoin vault use designated liquidators to observe market prices and vault conditions, which means trust assumptions persist.
Even though co-signing aims to prevent issues like censorship, the model still banks on having a sufficient number of reliable liquidators and large lenders, which introduces vulnerabilities despite the system’s security design.
Liquidation processes depend on price oracles, incurring risks of accuracy and timeliness. Delays or errors from the oracle would result in incorrect system operations. Both Band Protocol and Pyth Network, which are linked with Babylon Labs as oracle providers, have yet to respond to inquiries regarding their roles.
Shifting the Paradigm
The white paper gives a straightforward scenario: “Bob has 1 BTC and wants to borrow $50,000 from Larry using a lending framework on Ethereum.” Bob’s Bitcoin serves as collateral, and if the value drops below $50,000, Larry possesses the right to liquidate it.
Traditionally, participants face several trust-based assumptions. Bob could give his Bitcoin to Larry for safekeeping or give Larry the authority to liquidate it if necessary. Alternatively, Bob could utilize Wrapped Bitcoin (WBTC) through Ethereum smart contracts, but this introduces trust in the wrapping process, reliant on a centralized custodian’s integrity.
Babylon’s design aims to eliminate all trust issues by ensuring Bob and Larry pre-sign Bitcoin transactions that determine spending rights mutually.
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