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1. Liquid Network reserves are fully restored
The Liquid Federation announced in a post on X that the Liquid Network exploit has been fully repaired on the balance sheet: every LBTC token in circulation is once again backed one-to-one by bitcoin (BTC). The shortfall dates to September 6, when about 4,000 BTC, worth roughly $320 million at the time, left the federation's wallet. A final 250 BTC transfer closed the gap.
In the post, the federation said the network's bitcoin reserves had been "fully restored," reestablishing 1:1 backing for all LBTC. It pointed to an earlier step as part of the recovery: several weeks ago, swaps between BTC and LBTC at a 1:1 rate resumed through participating providers.
Adam Back, chief executive of Blockstream, the company that develops Liquid's technology, shared a screenshot of the network's reserve dashboard. It showed assets matching liabilities at 100 percent and a reserve deficit of 0.00 BTC. The federation added that anyone who runs their own Liquid node can check the reserves directly rather than relying on its word.
2. What is the Liquid Network?
Liquid is a Bitcoin sidechain, meaning a separate blockchain that runs alongside the main Bitcoin network and is linked to it. Blockstream launched it in 2018 to give traders, exchanges and other institutions faster settlement and more private transfers than the base layer typically offers.
The system works through a peg. A user locks bitcoin in a wallet controlled by the federation and receives an equal amount of LBTC on the sidechain. Later, the user can hand the LBTC back and withdraw the original bitcoin. As long as the locked reserve matches the LBTC in circulation, each token is redeemable for one bitcoin.
The federation that operates the arrangement is a group of exchanges and other crypto companies. Its members jointly run the network and hold the keys that authorize withdrawals from the reserve, which is why the security of those approval mechanisms sits at the center of the September incident.
This design differs from simply holding bitcoin on the main network. A sidechain user depends on the federation to honor redemptions, so the arrangement carries a trust assumption that ordinary on-chain bitcoin does not. The advantage is speed and flexibility; the cost is that holders rely on the operators to keep the reserve intact and the signing keys secure.
For that reason, the reserve ratio is the single most watched figure on a peg like this one. If the locked bitcoin falls below the number of tokens issued, the token is undercollateralized, and each unit is worth less than the one bitcoin it is meant to represent in any scenario where everyone tries to redeem at once.
3. How did the September 6 exploit unfold?
On September 6, people describing themselves as white-hat hackers withdrew about 4,000 BTC from the federation wallet. Blockstream's incident report at the time put the reserve at roughly 4,205 BTC before the event and about 197 BTC afterward, which means the peg was left badly undercollateralized. The attackers communicated with Blockstream through PGP-signed messages embedded in Bitcoin transactions.
A software flaw made the withdrawal possible. According to the account of the incident, a bug allowed roughly 4,000 LBTC to be created with nothing behind them, and those tokens were then redeemed for real bitcoin out of the reserve. In effect, the federation's honest holders were left sharing a pool that no longer covered every token.
On the following day, the hackers returned 3,400 BTC, about $269 million, after Blockstream said the bridge nodes had been patched. They kept roughly 598 BTC. That left a hole of about 600 BTC, which at current prices is worth more than $40 million.
The partial return did not end the dispute over how to describe the episode. Charles Guillemet, chief technology officer at the hardware-wallet maker Ledger, said that if the retained coins were a negotiated reward, the arrangement looked "more like extortion than white-hat hacking." Blockstream later declined to pay a ransom for the outstanding bitcoin. Its statement said that "Taking assets without authorization and withholding their return is a crime, not responsible disclosure," and it called the episode "theft."
The arithmetic shows how severe the situation was. With about 4,000 unbacked LBTC redeemed from a reserve of roughly 4,205 BTC, almost all of the collateral was gone. Even after 3,400 BTC came back, about 600 BTC remained missing, so the network spent nearly two months with tokens that were not fully covered.
The use of PGP-signed messages inside Bitcoin transactions is worth noting as well. It let the hackers contact Blockstream through a channel that could not be forged and that sat permanently on a public ledger, which made the exchange verifiable by outside observers even while the dispute over the attackers' motives continued.
4. What has changed to prevent a repeat?
Asked on X what would stop a similar incident, Back described three hardened lines of defense. The first is a refresh of the peg-out authorization keys, which are now held in cold hardware wallets. Cold storage keeps the keys offline, so an attacker cannot reach them through an internet-connected server.
The second is the disabling of proof-validation caches, together with a bug fix for nodes. Caches speed up verification by remembering earlier results, but a flaw in what gets remembered can let invalid data pass as valid, so turning them off removes one route an attacker could use.
The third is a change to the consensus rules so that they "fail closed." A system that fails closed rejects anything it cannot positively validate, instead of letting questionable transactions through when something goes wrong. Back also said the network has since undergone multiple third-party audits.
Each measure maps to a familiar security principle. Moving signing keys offline reduces the number of ways to reach them. Removing shortcuts in validation shrinks the code paths that can be tricked. Failing closed means that when the network meets an unexpected condition, the safe outcome is a halted or rejected transaction rather than an approved withdrawal.
Third-party audits add an independent check, although an audit reviews a system at a particular moment and cannot guarantee that future changes will be free of flaws. Users therefore have reason to keep watching the reserve dashboard rather than assume the problem is permanently solved.
5. Who paid for the last missing bitcoin?
The federation has not explained how the shortfall was covered. The hackers returned 3,400 of the roughly 4,000 BTC, so around 600 BTC had to come from somewhere for the reserves to reach full backing. The federation's announcement did not say whether the money came from its members, from Blockstream, from recovered funds or from another source.
That silence matters because LBTC holders are, in effect, trusting the federation's balance sheet. A restored dashboard figure shows that the reserve matches the tokens, but it does not show who bore the cost of restoring it. Users who want to confirm the numbers can do so by running a node, yet the origin of the final coins remains an open question.
Access to the reserve also remains limited. Swaps between BTC and LBTC at 1:1 have been available through providers such as SideSwap since late October, while direct withdrawals from the federation continue under what it calls enhanced operational controls.
The distinction between restored backing and explained backing is the core of the remaining concern. In an ordinary insurance or custody failure, readers expect to learn who absorbed the loss, because that determines who might be asked to absorb the next one. Without that detail, observers cannot tell whether members of the federation, Blockstream or some other party took on the cost.
The roughly 600 BTC at issue is worth more than $40 million, a sum large enough that the identity of the party supplying it bears on the federation's governance and on how much outside users should trust its stated safeguards.
6. Why Back urges caution about AI-suggested fixes
Beyond the technical measures, Back drew a wider lesson. He told developers to treat AI-suggested fixes "with suspicion (don't trust, verify)."
He had raised the subject earlier, in a Bloomberg Television interview on October 20. There he described "a wave of AI-assisted security analysis" over the previous couple of months. He said AI "is a tool to help develop code and to secure the code," but added that it can also find defects, and that this was affecting many companies in the sector.
In that interview, he also noted that the stolen funds remained under investigation. The new announcement does not report any update on that inquiry, so the question of who the attackers were and what happens to the roughly 598 BTC they kept is still unresolved.
7. What happens next for Liquid?
The federation says it is modernizing Liquid's governance, with clearer responsibilities and stronger oversight, along with additional technical and operational safeguards. It has promised more detail "in the coming weeks," but has not named a date.
Two items will shape confidence in the network. One is whether the federation discloses who funded the last 600 BTC. The other is when direct withdrawals return to normal operation, rather than relying on swap providers and enhanced controls. Until then, the 1:1 backing is something users can verify on-chain, while the circumstances behind it remain only partly explained.