A Liquid bug minted 4,000 unbacked L-BTC. Eight weeks on, the reserve is 550 BTC short
An attacker used a flaw in Liquid's software to create unbacked tokens and redeem them for about $319 million in real bitcoin, then sent 85% back. The reserve is still 550 BTC short and direct redemptions stay paused.
Key points
- On September 6, 2026, a bug let someone mint about 4,000 unbacked L-BTC on Liquid and swap them for real bitcoin. The reserve fell from about 4,205 BTC to 197 BTC.
- The self-described white hats sent back 3,400 BTC the next day and kept about 598.5 BTC.
- On November 2 the reserve covered about 87.1% of L-BTC in circulation, 550 BTC short, and redemptions to real bitcoin are still paused.
What was taken
On Sunday, September 6, 2026, someone used a software bug to create about 4,000 L-BTC with no bitcoin behind them on Liquid, a Bitcoin sidechain built by Blockstream, then swapped them for real bitcoin worth about $319 million. Most came back the next day, but on November 2 the reserve was still 550 BTC short and direct redemptions were still paused.
On Liquid, users lock real bitcoin with a group of operators called the federation and receive L-BTC, a token meant to be worth exactly one bitcoin. Going back the other way is called a peg-out. On September 6 the federation paid out against the unbacked tokens. Liquid's official channel later said the reserve fell from about 4,205 BTC to 197 BTC, according to its incident report.
On-chain analytics firm TRM Labs valued the withdrawal at about $319 million and counted 36 minutes between the unbacked mint and the payout. About 3,996 BTC reached the attacker.
Liquid posted a statement on X that evening. It said purported white-hat hackers had withdrawn about 4,000 BTC through the peg-out key of SideSwap, an approved operator, but that neither that key nor any other was compromised. It disabled its bridge nodes, effectively pausing the sidechain, and said exchanges had paused or would pause L-BTC deposits and withdrawals. Other Liquid assets such as USDT were not affected.
How the bug worked
Liquid hides transaction amounts using Confidential Transactions. To prove a hidden amount is valid, each output carries a range proof, a check that the number falls inside allowed bounds. Elements, the open-source software that runs Liquid, caches the results of those checks to save time.
Liquid's incident report said a vulnerability in that range-proof caching was exploited. TRM Labs, citing independent on-chain reconstructions, said the flaw may have let an invalid output pass as if it had already been checked. Without that check, a transaction can create spendable value from nothing.
SideSwap said the unbacked L-BTC came from an Elements software bug rather than a compromise of its systems. Blockstream told TRM Labs that none of its signing keys were compromised. A patch went out on September 7, and Elements version 23.3.4, which hardens the cache, followed on September 9, the channel said.
Timeline
Liquid block 4,050,336 includes about 4,000 unbacked L-BTC
Peg-out requested through SideSwap
Federation pays out about 4,000 BTC
Liquid publishes its statement on X and pauses bridge nodes
Patch deployed; 3,400 BTC returned to the federation
Elements 23.3.4 released
Block production resumes; transactions restart that evening, peg-outs stay off
Liquid says about 600 BTC is still unreturned
Audit dashboard shows a 550 BTC reserve deficit
How big the gap is
The return on September 7 restored most of the backing, but not all of it. Liquid said 3,400 BTC came back, leaving about 598.5 BTC, or 15%, outstanding. TRM Labs valued the returned coins at about $272 million and the retained coins at about $47 million.
The gap has narrowed only a little since. On November 2, Liquid's audit dashboard on mempool's liquid.network site showed 4,267.92 L-BTC in circulation against 3,717.92 BTC held by the federation. That is a reserve deficit of 550 BTC and coverage of about 87.1%. The dashboard flags the federation as insolvent on that basis.
Liquid federation bitcoin, before and after
BTC
Sources: Liquid official channel, liquid.network audit dashboard
White hats or extortion?
The recipients called themselves white hats from the start, and Liquid's first statement used the same label with the word purported. Blockstream tried to reach them with a signed on-chain message. Most of the coins came back on September 7, after the patch.
The leftover 598.5 BTC is the sticking point. TRM Labs said the attackers appear to treat it as a bounty, though it noted that the white-hat claim is unverified. Liquid's September 17 update said recovery efforts for the roughly 600 BTC were continuing. It did not describe any agreement with the attackers.
When redemptions might return
Normal transfers on Liquid are working again. Block production resumed on September 10 with no transactions as a precaution, and transactions restarted that evening. By September 17 several wallets and swap services were back online, Liquid's channel said.
Peg-outs are the exception. Liquid said they will resume only after full one-to-one bitcoin backing is confirmed and software updates, testing and independent security reviews are done. Blockstream has since published a technical security assessment on the root cause and planned changes, and the federation says it is working on a staged recovery and on governance improvements.
Liquid has not published a date for restoring peg-outs. Until then, holders who want bitcoin back must use third-party swap services.
LC Insight analysis
This section is our reading of the facts above, not a statement of fact.
- Liquid shows a bridge can be emptied with every key intact. The federation followed its rules. The problem was that the rules trusted a software check that could be fooled.
- We think someone, most likely Blockstream or the federation, will have to fill the 550 BTC gap before peg-outs return. Until then, L-BTC holders face a real, if partial, shortfall, and they have already lost two months of normal redemptions.
- Paying a negotiated cut to attackers who call themselves white hats would set a costly precedent. Holding out is the better position for the industry, even if the last coins never come back.
What's next
- A transfer of roughly 550 BTC into the federation wallet
- An official date for restoring peg-outs
- Any movement from the address holding the 598.5 BTC
- Coverage on the liquid.network audit dashboard
Disclaimer. This article is based on public information and the sources listed below as of the update time shown. It is for information only and is not investment, legal or tax advice. Figures may change as companies and authorities publish new data.
Sources
- Liquid Network, statement on X (September 6, 2026)
- Liquid official Telegram channel, incident and recovery updates (September 8 to 17, 2026)
- TRM Labs, Attackers drained $319 million from Liquid Network then returned 85% (September 2026)
- liquid.network (mempool), Liquid Federation audit dashboard (accessed November 2, 2026)
