Liquid Network Recovery: Swaps Return, Peg-Outs Stay Restricted

Liquid swaps work again, but the way out of the network that most users expect is still closed. The Liquid Network recovery has entered its final stages, the Liquid Federation said on October 20. That comes six weeks after an exploit let someone create about 4,000 unbacked LBTC. Converting through a swap provider is back. Direct peg-outs are not.

The Liquid Federation's October 20 post on the staged recovery. Source: Liquid blog, Liquid Network Staged Recovery Update.

What the Liquid Network recovery update says

The post says the Federation, Blockstream and outside security experts have rebuilt parts of the network's accounting and tested the safeguards needed to restart. A key step was deploying updated Federation software that manages the bitcoin reserves. Enough functionaries have installed it, according to the post, that the network is ready for the next phase.

Semi-automated BTC to LBTC swaps are being switched on with participating swap providers, with no volume limit imposed by the protocol. For most people using supported providers, the post says, this restores a practical way to turn LBTC into BTC. Direct peg-outs stay restricted for now, and the post says several safeguards remain in place to stop premature or unauthorized ones.

What still has to happen

The last stage is restoring full 1:1 bitcoin backing. After that the Federation plans a controlled restart of peg-outs for authorized key holders, plus monitoring of the reserves through block explorers. The post gives no date. The restart depends on the remaining security and operational work. More updates are promised as each stage completes.

How the September exploit worked

Blockstream's own assessment, published on September 23, explains why the Liquid Network recovery has taken this long. On September 6 an attacker abused a flaw in how Elements caches the checks on confidential transactions. A single transaction passed validation even though its output was not backed by its inputs. Liquid nodes, including the federation's, accepted it.

The executive summary of Blockstream's incident assessment. Source: Blockstream, Liquid Network Security Incident Assessment.

The report says the attacker pushed the unbacked coins through the normal peg-out process and withdrew about 4,000 BTC. It adds that the withdrawal ran through a peg-out authorization key held by a Federation member. Bitcoin's block explorer shows block 965,783 stamped September 6 at 14:28 UTC, the block the report cites for that withdrawal. Smaller peg-outs before the halt cut the reserve from about 4,205 BTC to 197 BTC.

The attacker returned 3,400 BTC on September 7, in Bitcoin block 965,950. The explorer stamps that block at 16:09 UTC, matching the report. Around 602 BTC remained outstanding when the report was written. USDt, DePix and other assets on Liquid were not affected, though they were unavailable while the network was paused.

Liquid runs on 15 functionary nodes, and blocks need 11 signatures. Blockstream shipped an emergency patch within hours of the attack and a reviewed hardening release, Elements v23.3.4, within days.

Anyone holding LBTC should read the October 20 post as a status report and not a guarantee. The Liquid Network recovery is unfinished, with peg-outs restricted and the reserve restoration still ahead.