Liquid Bitcoin Redemptions Still Frozen 35 Days After Exploit, Reserve Gap at 602 BTC
Redemptions remain frozen 35 days after exploit drained Liquid reserves
Liquid Network's bitcoin redemptions, known as peg-outs, remained suspended on Oct. 11, 35 days after an exploit drained its bitcoin reserves. An Oct. 11 snapshot from Mempool's Liquid explorer showed 3,632.23 BTC in federation reserves against 4,234.76 L-BTC outstanding, leaving a gap of about 602.53 BTC according to The Defiant's calculation. L-BTC is a token on Liquid, a Bitcoin sidechain (a separate blockchain that links to Bitcoin). It is designed to be backed one-for-one by real bitcoin.
The network has restored normal transfers between users, but the mechanism for converting L-BTC back into bitcoin remains shut down. Liquid said transactions resumed on Sept. 10, but peg-outs would only restart after full one-for-one backing was confirmed and software updates, testing, and independent security reviews were complete.
Reserve gap at roughly 602 BTC
- 3,632.23 BTC in federation reserves against 4,234.76 L-BTC outstanding, for a gap of about 602.53 BTC.
- Bitcoin coverage stands at 85.8% of outstanding L-BTC.
- 3,400 BTC were returned on Sept. 7, but the remaining shortfall persists.
- The Sept. 6 exploit created roughly 4,000 unbacked L-BTC before those tokens were converted to bitcoin through a federation member, SideSwap.
Blockstream says no ransom, recovery efforts continue
Blockstream's Sept. 23 incident assessment put the amount still subject to recovery efforts at approximately 602 BTC. The assessment explained that the exploit tricked Elements' cache of previously verified cryptographic proofs into accepting an invalid transaction. The peg-out mechanism relied on the sidechain's validated state rather than a separate reserve check, which allowed the unbacked tokens to be converted to bitcoin.
On Sept. 11, Blockstream stated it would not pay a ransom for the return of stolen funds and would work with law enforcement, exchanges, and forensic specialists to trace and recover the assets.
Security audit and software fixes underway
In its Sept. 29 update, Liquid said an independent external security audit of Elements v23.3.4 was underway, describing it as an additional layer of validation toward safely restoring peg-outs. The federation was also updating its peg-out authorization key list, replacing existing entries and ensuring peg-out keys were secured in cold storage.
The v23.3.4 software release hardens the range-proof cache keys and adds an option to disable the cache that was exploited.
No reopening date or funding commitment yet
Liquid's published recovery plan does not include a firm reopening date or a commitment to fund the remaining reserve gap. The audit and software fixes are only one condition for reopening; the federation also requires the full one-for-one backing to be restored before peg-outs can resume. Whether and when that gap will be closed is still unclear.
Sources
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