Liquid Network Halts Bitcoin Redemptions After Reserve Gap Emerges

Liquid Network has halted Bitcoin redemptions after a Sept. 6 exploit created about 4,000 unbacked Liquid Bitcoin (L-BTC), leaving the sidechain’s reserves at roughly 86% coverage of outstanding obligations.

The exploit allowed unauthorized L-BTC to pass validation before about 3,996 Bitcoin (BTC) was released from the federation reserve at 10:28 a.m. ET (14:28 UTC). The reserve later received about 3,400 BTC, but approximately 602 BTC remained outstanding.

TRM Labs estimated that roughly 3,597 BTC remained in the identified reserve address against about 4,200 L-BTC outstanding. The estimate implies about 86% backing but does not represent a complete reconciliation of reserves and liabilities.

Liquid restored normal user transactions after deploying a fix for the Elements software vulnerability. Peg-outs, which convert L-BTC back into BTC, remained suspended while recovery work and security reviews continued.

Liquid is a federated Bitcoin sidechain designed to keep each L-BTC backed one-to-one by BTC held in a federation-controlled reserve. The incident affected Liquid’s validation and withdrawal systems rather than Bitcoin’s base layer.