Aave Proposes Institutional-Custodied Lending Model for On-Chain Borrowing

Aave Labs is working on a new lending structure that would enable institutions to borrow on-chain without moving their Bitcoin out of regulated custody. The proposal, titled 'Custodied Collateral Lending: Aave V4 Isolated Hub & Spoke,' aims to create a new Aave V4 setup designed specifically for assets held with institutional custodians.

In this model, the borrower's Bitcoin would remain at Anchorage Digital Bank, while an on-chain receipt represents the collateral. Chainlink's CustodySync infrastructure would mint and burn a non-transferable Custodied Collateral Token (CoCT) as the custodied balance changes, keeping the off-chain custody account and Aave lending position aligned.

This design seeks to address the problem of institutional crypto holders wanting access to on-chain liquidity without moving assets out of qualified custody. By keeping the asset inside a regulated custody environment while DeFi handles the credit side, this model tries to split the difference between security and convenience.