To enable Aave V4 to track collateral on Ethereum, the integration creates a transfer-restricted ERC-20 token named vaultBTC as an internal accounting record representing locked Bitcoin on a one-to-one basis.

From the articleBabylon Proposes Native BTC Collateral and New Spokes on Aave V4Also in Babylon advances native Bitcoin collateral plan for Aave V4, Babylon wants Aave users to borrow against Bitcoin, Babylon Moves Bitcoin Lending Proposal Forward on Aave V4