Liquid Network indicates that after the hack incident in September, its LBTC has once again obtained sufficient Bitcoin support, but direct withdrawals are still restricted.
In a statement on Tuesday, Liquid Federation confirmed that its reserves have "been fully restored, and all 1:1 BTC support for LBTC has been re-established."
Prior to the release of this announcement, the Federal Reserve wallet had received multiple Bitcoin transfers, including the last deposit of 250 BTC on November 2nd. On-chain records show that when the gap was filled, approximately 4,268.95 BTC provided support for an equivalent amount of LBTC.
Liquid Network filled a gap of approximately 600 BTC after a vulnerability attack
This recovery stems from an attack on September 6th targeting the open-source software Elements used by Liquid Network.
Blockstream explained in its security incident assessment that a vulnerability in transaction verification allowed attackers to mint approximately 4,000 LBTC without depositing the corresponding amount of Bitcoin.
Subsequently, the attacker exchanged these tokens for actual BTC through SideSwap. SideSwap is one of the federal members and is authorized to handle withdrawals.
Due to these unauthorized transactions, as well as other withdrawals completed before the operation was halted, Liquid's reserves decreased from approximately 4,205 BTC to 197 BTC.
On September 7th, after communicating with Blockstream through information recorded on the Bitcoin blockchain, the attacker returned 3,400 BTC.
Relevant individuals claim to be white-hat security researchers, but their identities and motives have not been independently verified.
Blockstream estimated the remaining unpaid amount to be around 602 BTC in the September assessment.
The replenishment efforts were accelerated in late October, with an initial deposit of 2.5 BTC on October 27th, followed by another deposit of 50 BTC the next day.
On November 2nd, two larger transfers completed this process, adding 300 BTC and 250 BTC to the federal wallet respectively.
Subsequently, SideSwap confirmed this sequence of deposits and stated that the reserves were matched with the supply of LBTC in circulation.
As of November 3rd, updated data shows that there are 4,270.54 BTC supporting an equal number of LBTC, which reflects additional activity that has emerged after the initial recovery.
Who replenished the Bitcoin reserves for Liquid Network?
Although on-chain records show these deposits, the latest federal statement does not specifically identify which parties provided an alternative to Bitcoin.
This is very important because returning stolen funds and providing new bitcoins are two different ways of recovery.
Of the initial amount taken away, the attacker returned 3,400 BTC in September. The remaining shortfall was covered by subsequent deposits.
It is reported that when Samson Mow, a member of the board of directors of Liquid Federation, was asked about the source of funds, he pointed to Blockstream as the source of funds.
"As I have said many times, Blockstream," Mow wrote in response to a question on X.
However, the federation has not disclosed the detailed allocation of the alternative funds, nor has it stated whether there are any other members participating in the funding.
In a statement on November 3, SideSwap thanked Blockstream and federal members for completing the recovery efforts, but did not disclose the source of funds independently.
The restored balance indicates that there is now sufficient Bitcoin back in the reserves. However, this does not alone reveal who the owners of the wallets that provided these funds are.
Liquid Network Exchange services have been resumed, but direct withdrawals are still restricted.
The mechanism adopted by Liquid Network is as follows: The BTC that is stored on the Bitcoin main chain will be represented on its sidechain in the form of LBTC.
Users can transfer LBTC within Liquid, and authorized federal members are responsible for exchanging it back for BTC.
After the vulnerability was exploited, the federation suspended withdrawals and temporarily halted network activities while developers worked to fix the issue.
According to previous reports from crypto.news, Liquid resumed block generation in September and subsequently gradually returned to normal trading.
Subsequently, the network introduced an updated authorization process and began to conduct independent security reviews on Elements and v23.3.4.
According to the recovery plan on October 20th, the federation allows participants to resume the exchange of BTC / LBTC, but still retains the restrictions on direct exchanges of peg-out.
SideSwap indicates that its exchange service was reopened on October 20th. Customers can exchange LBTC for BTC at a 1:1 exchange rate, but a fee of 0.1% will be charged.
However, these payments currently come from SideSwap's own Bitcoin wallet, so it is necessary to manually top up the funds.
The provider warns that withdrawals may enter a queuing state when the available Bitcoin balance is insufficient.
Direct federal peg-out facilities are still subject to additional security and operational requirements, and the date for reopening has not yet been confirmed.
Federal plans to adjust governance and strengthen protections
The federation stated that following this incident, it plans to modernize its governance structure and introduce clearer division of responsibilities and supervision mechanisms.
The planned work also includes additional technical and operational protective measures to prevent similar failures from occurring again.
Blockstream has previously released Elements and v23.3.4 to fix this vulnerability and to make adjustments to the software's transaction verification process.
The federation has been continuously updating the authorization arrangements used by members when processing withdrawals, including the procedures involving offline Bitcoin keys.
The statement in November promised to provide more information regarding governance changes and security measures in the "next few weeks."
