Liquid Network's bitcoin reserve is again fully backed after Blockstream replenished the roughly 600 BTC left missing following September's exploit, removing the shortfall that had left some LBTC holders dependent on the Federation's recovery plan.
The Liquid Federation said Tuesday that its reserves now provide 1:1 backing for all outstanding LBTC, the bitcoin-backed asset used on the Liquid sidechain. Federation board member Samson Mow said the final replenishment came through transfers linked to Blockstream, the company that develops the Elements software underlying Liquid.
The restoration follows an exploit on Sept. 6 in which an attacker created approximately 4,000 unbacked LBTC and used it to withdraw bitcoin held in Liquid's reserve wallet. Roughly 3,400 BTC was returned the following day, leaving a deficit of about 600 BTC, valued at around $320 million at the time described in the incident account.
Mow reported that a 50 BTC deposit on Oct. 28 reduced the outstanding gap to 550 BTC. Two transfers on Monday, one for 300 BTC and another for 250 BTC, completed the replenishment, he said.
Liquid said reserve balances can be independently viewed through its website. Full backing means the bitcoin held by the Federation matches the amount of LBTC in circulation, restoring the basis on which users can redeem the sidechain asset for BTC.
Direct peg-out status remains unclear
The Federation's announcement did not say whether it had lifted restrictions on direct peg-outs, the process through which users redeem LBTC for bitcoin from the Federation-controlled reserve.
Users have been able to exchange BTC and LBTC through participating providers for several weeks. Direct Federation peg-outs, though, had been limited as operators carried out additional security checks after the attack. The distinction remains relevant for users who rely on Liquid's native redemption path rather than third-party liquidity providers.
Liquid operates as a Bitcoin sidechain, using a federation of functionaries to manage bitcoin deposits, withdrawals and block production. Users lock BTC into the federation's custody to receive LBTC on Liquid, where the asset can move more quickly and support confidential transactions and other features built into Elements.
That structure gives reserve management unusual weight. An LBTC supply exceeding the bitcoin reserve would undermine the asset's redemption guarantee, even if users can still trade it through external providers. With the reserve now whole, attention shifts from the immediate balance-sheet repair to whether the Federation's operational changes reduce the likelihood of a similar exploit.
A software flaw produced unbacked LBTC
Liquid's September incident report attributed the breach to a bug involving cached range-proof verifications in Elements. Range proofs are cryptographic tools used in confidential transactions to verify that transaction amounts are valid without publicly revealing the amounts themselves.
According to the Federation's account, the flaw allowed an attacker to create about 4,000 LBTC without corresponding bitcoin being added to the reserve. The attacker then withdrew bitcoin through SideSwap, a Federation member that holds a peg-out authorization key.
The Federation said its network operators were not compromised and no cryptographic keys were stolen. That finding separates the incident from a conventional wallet breach, but it also places the focus on the code and validation processes governing issuance of Liquid's core asset.
Elements version 23.3.4, containing a fix for the vulnerability, was released on Sept. 9. Liquid block production resumed later that day, while user transactions returned on Sept. 10. Federation peg-outs remained disabled at that stage as the network moved through its recovery process.
Blockstream later declined a request reportedly tied to the return of the remaining bitcoin, in which the attacker sought a 10% bug bounty. The missing reserve was instead replaced through the transfers identified by Mow.
Governance changes are the next test
The Federation said it is preparing changes to governance and oversight along with further technical and operational safeguards, with more details expected in the coming weeks.
Those measures will be closely examined because the September incident exposed two separate pressures on the network: whether Elements prevents invalid LBTC issuance, and whether the Federation has sufficiently robust procedures for responding when the bitcoin reserve is affected.
Technical patches address the specific vulnerability described in the incident report. Governance reforms could determine how Federation members supervise peg-out authorities, manage emergency decisions and disclose operational restrictions to users during a crisis.
The replenishment also removes a potentially disruptive mismatch between Liquid's supply of LBTC and its BTC reserve without requiring holders to absorb a haircut or wait for the attacker to return the remaining funds. Blockstream's decision to supply the final bitcoin effectively moved the cost of the unresolved loss away from LBTC holders and into the company's recovery effort.
Users seeking to redeem LBTC directly will now be watching for a clear update on peg-out availability. The forthcoming governance details will offer a clearer view of whether Liquid's response extends beyond restoring the reserve to changing the controls around the system that secures it.
Concerned about exploits and reserves? Learn how CEXs manage user funds and security in Proof of Reserves.
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