Aave V4 Proposes Institutional BTC Collateral Lending via Anchorage

Aave (AAVE) V4 has proposed a structure allowing institutions to borrow stablecoins against Bitcoin (BTC) held in custody by Anchorage, without moving the BTC on-chain. The collateral is represented via non-transferable tokens indicating custodial balances.

Aave Labs posted an ARFC titled 'Custodied Collateral Lending: Aave V4 Isolated Hub & Spoke' to its governance forum on September 14. The proposal enables institutional custody assets to be used for lending through isolated hubs and spokes, separate from existing markets.

The key mechanism is the Custodied Collateral Token (CoCT), which acts as an internal accounting unit showing Anchorage's BTC balance on-chain but does not represent direct ownership or claim rights. CoCTs are issued or burned based on custody balance changes, with loan and repayment statuses reflected across both systems via Chainlink’s CustodySync.

Chainlink and Aave do not hold the collateral; it remains with Anchorage during the loan period, with on-chain data linking collateral balances to loan positions. The isolated hub-and-spoke structure manages separate collateral and assets to prevent risk spillover between hubs and spokes, while keeping existing market reserves unchanged.

The proposal builds on prior reporting about using Anchorage’s custody assets for stablecoin loans, now incorporating CoCT and CustodySync to link custodial balances with loan positions. Liquidation differs from standard on-chain automated sales: if liquidation triggers, Anchorage sells BTC off-chain (OTC) and uses proceeds to settle Aave debt.

Some governance forum participants noted that OTC liquidations could lag behind on-chain processes during price crashes or market gaps. Given increased reliance on CustodySync and oracles, suggestions included conservative collateral ratios, supply/borrow limits, and circuit breakers to mitigate synchronization failures.

Aave Labs described the proposal as expanding institutional on-chain credit access using Anchorage’s custody assets and Chainlink infrastructure. However, some raised concerns about off-chain liquidation delays and system dependencies as risk factors.