When researching Trustless Bitcoin Vaults (TBV) based on @BabylonLabs_io , I found an issue that’s easy to overlook: making native BTC serve as collateral is only the first step; what’s really troublesome is how much collateral needs to be taken during liquidation.
In most DeFi systems, collateral can usually be split with precision. If the position becomes unhealthy by a bit, the protocol sells part of the collateral to cover the shortfall. But in TBV, each Vault essentially corresponds to an independent Bitcoin UTXO, and a UTXO can’t be sliced off arbitrarily like an account balance. A Vault is either kept in full or redeemed/handled in full.
This means that if a user puts all their BTC into one large Vault, even if the debt deficit is only a small fraction, liquidation may still have to revolve around the entire Vault. The problem isn’t just the liquidation price anymore—it’s whether the collateral granularity design is reasonable.
TBV’s approach is interesting: split BTC into Vaults of different sizes in advance, and set a liquidation order. Put a smaller “sacrificial Vault” first, designed to cover potential debt first; then place the remaining funds into a “protective Vault.” When the position goes wrong, the protocol handles the former first rather than directly touching all collateral assets.
In my view, this design shows that TBV isn’t simply routing BTC into a lending market like Aave. Instead, it’s re-adapting to Bitcoin’s UTXO model. It doesn’t pretend BTC is as flexible as an ERC-20 token; it directly incorporates the indivisibility of the underlying asset into risk management.
Of course, this also shifts more responsibility to users and the frontend: how many Vaults to split into, how much to borrow, and how much safety margin to leave—all of these will affect the liquidation outcome. But this way of clearly exposing constraints may be more worth attention than hiding risk behind bridges, custodians, and wrapped assets.
$BABY What truly needs to be proven is whether this native BTC collateral mechanism can be not only safe, but also sufficiently usable.
#baby
In most DeFi systems, collateral can usually be split with precision. If the position becomes unhealthy by a bit, the protocol sells part of the collateral to cover the shortfall. But in TBV, each Vault essentially corresponds to an independent Bitcoin UTXO, and a UTXO can’t be sliced off arbitrarily like an account balance. A Vault is either kept in full or redeemed/handled in full.
This means that if a user puts all their BTC into one large Vault, even if the debt deficit is only a small fraction, liquidation may still have to revolve around the entire Vault. The problem isn’t just the liquidation price anymore—it’s whether the collateral granularity design is reasonable.
TBV’s approach is interesting: split BTC into Vaults of different sizes in advance, and set a liquidation order. Put a smaller “sacrificial Vault” first, designed to cover potential debt first; then place the remaining funds into a “protective Vault.” When the position goes wrong, the protocol handles the former first rather than directly touching all collateral assets.
In my view, this design shows that TBV isn’t simply routing BTC into a lending market like Aave. Instead, it’s re-adapting to Bitcoin’s UTXO model. It doesn’t pretend BTC is as flexible as an ERC-20 token; it directly incorporates the indivisibility of the underlying asset into risk management.
Of course, this also shifts more responsibility to users and the frontend: how many Vaults to split into, how much to borrow, and how much safety margin to leave—all of these will affect the liquidation outcome. But this way of clearly exposing constraints may be more worth attention than hiding risk behind bridges, custodians, and wrapped assets.
$BABY What truly needs to be proven is whether this native BTC collateral mechanism can be not only safe, but also sufficiently usable.
#baby