The Liquid Federation has announced that the Liquid Network’s bitcoin reserves have been fully restored, reestablishing 1:1 BTC backing for LBTC, the token that represents bitcoin on Blockstream’s sidechain. The restoration comes nearly two months after a September exploit drained approximately $320 million in BTC and left a gap in the network’s reserve. The missing coins were reportedly supplied by Blockstream.

Blockstream filled the reserve gap

In an announcement posted on X on Tuesday, November 3, the Liquid Federation wrote that it “is pleased to announce that the network’s bitcoin reserves have been fully restored, reestablishing 1:1 BTC backing for all LBTC.”

Blockstream CEO Adam Back shared a screenshot of a dashboard showing Liquid Network’s assets matching liabilities at 100%. The screenshot also showed that the reserve deficit now stands at 0.00 BTC.

When Samson Mow, a Liquid Federation board member and former Blockstream executive, was asked about the source of the funds, he answered, “As stated many times, Blockstream.”

Mow tracked the deposits publicly as they arrived. According to his updates, 50 BTC landed in the federation wallet on October 28, leaving 550 BTC short. Another 300 BTC was added to the wallet on Monday, followed by a further 250 BTC later the same day, completing the restoration of the peg.

The deposits also close the loop on the exploit’s arithmetic: of the roughly 4,000 unbacked LBTC minted in September, 3,400 BTC came back the next day, leaving about 600 tokens outstanding — the same gap now filled by the 600 BTC Mow tracked arriving. The shortfall was more than a bookkeeping entry: unbacked LBTC can be routed through peg-out services to withdraw real bitcoin, as the attacker demonstrated through SideSwap, so until the refill each outstanding unbacked token represented a claim the reserve could not honor.

Direct swaps between bitcoin and LBTC had already resumed weeks earlier through participating providers. However, the Federation has not said whether all remaining peg-out restrictions have now been lifted, and beyond the Blockstream deposits it has not disclosed how the reserve hole was fully covered.

How attackers minted unbacked LBTC

Self-described white-hat hackers exploited a buy-in in Elements, the open-source software that runs Liquid, on September 6 — an incident later covered in Liquid Network’s security incident assessment. The flaw was located in a cache that stored the results of expensive rangeproof checks. Because the cache key left out the asset commitment and the scriptPubKey, a node could reuse a previously verified proof in a context where it was not valid.

That weakness enabled the attacker to mint around 4,000 unbacked LBTC and route them through SideSwap’s peg-out service to withdraw real bitcoin. Private keys were not stolen in the exploit, thanks to the federation’s 11-of-15 multisig and SideSwap authorization keys, which worked as designed.

The following day, the attacker returned 3,400 BTC but held onto about 598 BTC, which was worth around $47 million at the time. The attacker then demanded a 10% bug bounty in exchange for the remaining coins. Blockstream refused the offer, saying it would not “pay a ransom that far exceeds their economic participation.” A few days later, on September 9, Blockstream shipped a hardened Elements release, v23.3.4.

Can the fixes prevent future attacks?

When asked under his initial post on X what would stop the same kind of attack from happening again, Back said that three lines of defense have been hardened. He wrote that peg-out authorization keys (PAK) have been refreshed and moved to cold hardware wallets. Proof validation caches, he noted, have been disabled and the bug fixed for nodes. For the third fix, Back wrote that consensus rules have been hardened, “and fail closed.” He added that the systems have gone through multiple third-party audits.

The warning on AI-suggested fixes

Back also said that one of the lessons drawn from the incident is to treat every AI suggestion with suspicion, stating, “don’t trust, verify.”

His warning does not come out of nowhere. Independent analysis suggested that the September attacker reverse-engineered the vulnerability from a publicly titled GitHub commit before any production node had been upgraded. According to Google’s Threat Intelligence Group (GTIG), attackers exploited 141 flaws between January and August 2026 — 14 incidents more than the 127 recorded across the whole of 2025. It was disclosed that AI tools are shrinking the gap between a bug’s disclosure and a working exploit.

The Liquid Federation has said that it is also preparing changes to governance and oversight, with more detail promised in the coming weeks.

Source: Cryptopolitan