Liquid Network restores full LBTC backing two months after $320m exploit

Liquid Network has restored full bitcoin backing for LBTC two months after a $320 million exploit, Bitcoinist reported on 3 November. The Liquid Federation said reserves are “fully restored, reestablishing 1:1 BTC backing for all LBTC”. Mempool data shows 4,268.95 BTC in reserve against 4,268.95 LBTC in circulation.

Liquid is a Bitcoin sidechain. The federation holds BTC in reserve to back each LBTC one to one, so you can move bitcoin faster and more privately and swap back at par. In September the reserve stopped covering the tokens.

What went wrong

• 6 September: an attacker used a flaw in Elements, the software Liquid runs on, in how it cached transaction verification results, and minted about 4,000 LBTC without depositing BTC;
• the attacker swapped the unbacked LBTC for real BTC through SideSwap, and reserves fell from about 4,205 BTC to 197 BTC before the federation halted operations;
• 7 September: after negotiations, the attacker, who claimed to be a white hat, returned 3,400 BTC and left about 600 BTC missing.

We covered the ransom talks at the time: the attacker and the federation negotiated in messages attached to blockchain transactions. Blockstream later published a security assessment of the bug.

Who closed the gap

The roughly 600 BTC shortfall was worth more than $40 million. Several deposits in late October and early November closed it, the last a 250 BTC transfer. Blockstream chief executive Adam Back posted a dashboard screenshot showing a reserve deficit of 0.00 BTC.

The federation did not say where the money came from. Samson Mow, a Liquid Federation board member and former Blockstream executive, named Blockstream as the source. No funding breakdown has been published, so that claim rests on Mow's word.

What you can do now

Swaps between BTC and LBTC at 1:1 work again through participating providers such as SideSwap, available since late October. Direct withdrawals from the federation remain under “enhanced operational controls”. Full backing is a precondition for reopening them, and the federation has not reopened them yet.

The federation promised changes to governance, oversight and technical safeguards, with details “in the coming weeks”.

If you hold LBTC, your coins are backed again, but the repair depended on two parties outside your control: an attacker who sent back 3,400 BTC and a company that, by Mow's account, covered the rest. After the Binance hack in late October, holders there also waited on a single company to decide how losses would be handled.

Blockstream's role as the funder comes from Samson Mow; the federation has not confirmed it or published a breakdown.