Liquid Bitcoin Redemptions Remain Frozen With 85.8% Reserve Coverage

Liquid Network’s bitcoin redemptions remained suspended on Oct. 11, 35 days after an exploit drained its reserves, with bitcoin holdings covering about 85.8% of outstanding L-$BTC.

An Oct. 11 snapshot 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 about 602.53 $BTC, according to The Defiant’s calculation. Liquid is a Bitcoin sidechain whose L-$BTC token is designed to be backed one-for-one by bitcoin.

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. Its published recovery plan gives no firm reopening date or commitment to fund the reserve gap.

The shortfall persists 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 efforts 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 was also updating its peg-out authorization key list, replacing existing entries and ensuring peg-out keys were 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. Blockstream’s public position has focused on recovering the outstanding funds. “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.