Bitcoin Lending Returns with Self-Custody Focus as Babylon Secures $15M from a16z

Babylon Raises Funds for Bitcoin-Native Lending Infrastructure

Babylon, a decentralized protocol enabling native Bitcoin staking and lending, has secured $15 million in funding from a16z Crypto through the sale of its BABY tokens to the digital asset arm of Andreessen Horowitz ^[1].

According to a blog post published by a16z Crypto, the investment will support ongoing development of Bitcoin-native infrastructure that addresses the limited programmability of Bitcoin, which has left substantial amounts of BTC sitting idle ^[1]. The firm argues that enabling Bitcoin to function as collateral could unlock significant onchain capital and transform BTC into a productive asset within decentralized finance ^[1].

Founded in 2022 by David Tse and Fisher Yu, Babylon Labs is building a Bitcoin-native system of trustless vaults that permits BTC to be used as collateral in onchain lending while keeping the cryptocurrency on the Bitcoin network and under user control ^[1]. In December, the protocol partnered with Aave Labs to bring native Bitcoin-backed lending to Aave V4, with plans to develop a dedicated "Bitcoin-backed Spoke" that eliminates the need for wrappers or custodians ^[1]. Testing is scheduled to begin in the first quarter of 2026, with a joint product launch targeted for April 2026 ^[1].

Lending Sector Resurfaces with Stricter Controls

The crypto-backed lending sector, widely blamed for amplifying the fallout from the 2022 FTX collapse due to opaque balance sheets, rehypothecation, and excessive leverage, is making a comeback in 2025 with a more cautious approach ^[1].

Lenders are now emphasizing full collateralization, stricter custody practices, and tighter risk controls ^[1]. In January, Coinbase reintroduced Bitcoin-backed loans in the United States, permitting eligible users outside New York to borrow up to $100,000 in USDC against BTC held on the platform through loans facilitated by Morpho Labs and executed on Base, Coinbase's Ethereum layer-2 network ^[1].

Xapo Bank launched Bitcoin-backed US dollar loans in March, enabling eligible clients to borrow up to $1 million against their BTC holdings ^[1]. The bank positioned the offering for long-term Bitcoin holders seeking liquidity without selling, emphasizing that collateral remains in institutional MPC custody and is not rehypothecated ^[1].

Digital asset lender Ledn transitioned to a fully collateralized, Bitcoin-only lending model in May, with the company stating that client Bitcoin used as collateral will remain in custody and will not be loaned out or reused to generate yield ^[1]. Ledn co-founder Mauricio Di Bartolomeo noted in June that Bitcoin holders are increasingly using BTC-backed loans to finance real estate purchases, which allows them to access liquidity while typically avoiding capital gains taxes ^[1].

Self-Custody Wallet Innovation Continues

As the Bitcoin lending sector evolves, self-custody remains a fundamental value proposition of Bitcoin, with new wallet technologies emerging to make it more accessible ^[2].

Mobile wallets like Phoenix Wallet offer optimized experiences for users concerned with self-custody, supporting full self-custody for on-chain payments while excelling at Lightning Network payments ^[2]. Blockstream Wallet provides well-rounded support for Bitcoin on-chain transactions along with native support for the Liquid Network, which has gained popularity for offering comparable speeds to Lightning with enhanced privacy features ^[2].

Bull Bitcoin Mobile wallet has made an impression among self-custody advocates with its purist design philosophy, implementing the async Payjoin protocol for enhanced on-chain privacy and leveraging the Liquid network with Boltz protocol support for Lightning payments ^[2].

On the hardware side, the Coldcard Q has emerged as a security-focused option, featuring a transparent shell for hardware verification, a physical keyboard, and NFC antennas for transaction signing while deliberately avoiding Bluetooth support ^[2]. For users seeking multi-signature solutions, Casa Wallet continues to lead in user experience, offering two general models requiring either 2 of 3 or 3 of 5 keys to sign transactions, with subscriptions ranging from $250 to $2,100 annually ^[2].