Liquid Network Bitcoin Redemptions Remain Frozen With 85.8% Reserve Coverage

Liquid Network's bitcoin redemptions remained suspended on Oct. 11, 35 days after a Sept. 6 exploit drained the Bitcoin sidechain's reserves, leaving bitcoin holdings covering about 85.8% of outstanding L-BTC.

A snapshot taken Oct. 11 from Mempool's Liquid explorer showed 3,632.23 BTC in federation reserves against 4,234.76 L-BTC outstanding. That leaves a gap of approximately 602.53 BTC, according to The Defiant's calculation. The ratio is publicly verifiable on the explorer and marks how far the sidechain sits from the one-to-one backing its own reopening rules require.

Liquid is a Bitcoin sidechain whose L-BTC token is designed to be backed one-for-one by bitcoin, with a federation of members authorizing peg-outs through a shared key list. For holders, the network's recovery has restored transfers without restoring its bitcoin redemption mechanism, known as peg-outs. Liquid said transactions resumed on Sept. 10, but peg-outs would restart only after full one-for-one backing was confirmed and required software updates, testing, and independent security reviews were complete. The published recovery plan gives no firm reopening date and no commitment to fund the reserve gap.

Shortfall Persists Despite Partial Recovery

The gap remains despite the return of 3,400 BTC on Sept. 7, a recovery previously reported by The Defiant. Blockstream's Sept. 23 incident assessment put the amount still subject to recovery at approximately 602 BTC.

Audit and Withdrawal Controls

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 is also updating its peg-out authorization key list, replacing existing entries and ensuring peg-out keys are secured in cold storage.

The software release addresses the validation failure behind the drain. According to Blockstream's assessment, the Sept. 6 exploit tricked Elements' cache of previously verified cryptographic proofs into accepting an invalid transaction, creating roughly 4,000 unbacked L-BTC. Those tokens were then converted into bitcoin through the standard peg-out process via federation member SideSwap.

Blockstream said the peg-out mechanism relied on the sidechain's validated state rather than a separate reserve check. The v23.3.4 release hardens the range-proof cache keys and adds an option to disable that cache.

The audit is only one condition for reopening. The federation's stated requirement for full backing also means the reserve gap must be closed before peg-outs resume. Blockstream's public position has focused on recovering the outstanding funds. Until the plan advances, the observable checkpoints are the audit's completion, the finished key rotation, and any progress on the roughly 602 BTC still listed as subject to recovery.

"Blockstream will not pay a ransom for the return of stolen funds," the company said on Sept. 11, adding that it would work with law enforcement, exchanges, and forensic specialists to trace and recover the assets.

Source: CryptoNewsNet, based on reporting by The Defiant.