Episode 2 of The Vault: Whiteboard Session was historic. Two months after publishing the whitepaper, Babylon ran the first-ever trustless BTC-backed lending experiment on Ethereum mainnet, no wrappers, no intermediaries. Here’s what went down 👇🏼

The problem: Bitcoiners can’t use BTC directly as collateral in DeFi lending apps like @MorphoLabs without wrapping it (for example, wBTC), which adds custodial risk. Babylon’s goal is to enable BTC to be used natively with no wrapped assets and no extra trust assumptions.

The solution: Trustless Bitcoin Vaults Each vault is a special Bitcoin UTXO that serves as collateral. If a borrower repays their loan, they can withdraw trustlessly. If a liquidation happens, the liquidator can claim using cryptographic proofs.

To make this work, Babylon combined: ZK proofs to attest events from Ethereum, such as loan repayments Garbled circuits to verify these proofs off-chain Custom Bitcoin scripting to allow secure claims This approach solves a long-standing challenge: verifying ZK proofs on Bitcoin.

The experiment connected Bitcoin and Ethereum through a Babylon middleware layer. On Ethereum, Morpho handled loans in USDC. On Bitcoin, the borrower deposited BTC into a vault. The middleware minted an ERC-20 token called VaultBTC that represented the Bitcoin collateral.

Three experiments were run: 1️⃣ Borrower repays → liquidator’s false challenge blocked → borrower reclaims vault 2️⃣ Borrower submits invalid proof → valid challenge blocks withdrawal 3️⃣ Liquidator performs valid liquidation → claims vault trustlessly All experiments ran live on mainnet.

This was the first system to verify ZK proofs on Bitcoin using garbled circuits. It’s a major step toward connecting Bitcoin to DeFi in a secure and trustless way. Credit to @dntse, @vitsalis, and the Babylon Labs team, along with collaborations from @MorphoLabs, @SuccinctLabs, and @robin_linus for making this milestone possible.