The Liquid Network is entering a recovery phase after experiencing an abnormal outflow of approximately 4,000 BTC.

On September 10, Liquid began producing blocks again, and some markets like SideSwap have already resumed trading. However, this does not mean the network has fully recovered: Peg-in and Peg-out are still closed, which means the exchange channel between BTC and L-BTC has not yet reopened.

Previously, about 4,000 BTC were transferred out from the Liquid Federation reserve wallet, peaking at approximately 95% of its reserves. On September 7, the related address returned 3,400 BTC, about 85% of the outflowed funds; approximately 598.5 BTC have still not returned to the Federation reserve.

Therefore, Liquid now faces three questions instead of just a simple "fix the vulnerability":

Is the vulnerability completely fixed? Is the reserve restored? Can L-BTC be redeemed at a 1:1 ratio again?

First, a summary

The Elements vulnerability has been fixed by v23.3.4.

Liquid has resumed block production, but is still in a controlled recovery phase.

3,400 BTC have been returned.

Approximately 598.5 BTC are still in the related address, worth about $47 million.

Peg-in/Peg-out remain closed, and the L-BTC exchange function has not yet fully recovered.

Currently, the Liquid Federation reserve is approximately 3,597 BTC, while the circulating L-BTC is about 4,205, with public data corresponding to a reserve coverage of approximately 85%.

The vulnerability is fixed, but the “accounts” are not yet fully balanced

What is most noteworthy about this incident is that it is not a traditional case of private key theft.

The attacker exploited a validation vulnerability in the Elements software, generating L-BTC that was not supported by actual BTC reserves, and then exchanged it for real BTC through the Peg-out process of SideSwap.

Thus, the issue is not "who obtained the Federation's private keys," but rather:

The system mistakenly believed in the existence of L-BTC that should not have existed.

This is also why the incident is so serious—the attacker did not directly breach the reserve wallet but exploited the validation logic to make the system voluntarily release real BTC. Both SideSwap and Liquid stated that the related Peg-out authorization keys were not compromised.

3,400 BTC returned, but there are still 598.5 BTC

After the vulnerability was fixed, both parties communicated via OP_RETURN messages on the Bitcoin chain.

Blockstream confirmed that after the bridge node was patched, the related address returned 3,400 BTC to Liquid Federation on September 7.

However, in the same transaction, approximately 598.5 BTC still returned to the address that previously controlled the funds.

This portion of funds remains the biggest mystery in the entire incident.

The participants involved claim to be "white hats" and link the remaining funds to a bounty for the vulnerability, but currently, there is no publicly confirmed agreement that proves this 598.5 BTC has been officially recognized as a bounty for the vulnerability.

So from an asset security perspective:

Vulnerability fixed does not equal funds fully recovered.

The network recovery does not mean L-BTC is back to normal

On September 10, Liquid resumed block production, and the SideSwap market has reopened.

However, the most crucial Peg-in / Peg-out remains closed.

This means that users can see the network functioning again, but the bidirectional exchange between BTC and L-BTC is still restricted.

According to the latest data released by SideSwap, Liquid currently has approximately 4,205 circulating L-BTC, with Federation reserves of about 3,597 BTC, corresponding to an approximate 85% coverage ratio.

This is why the recovery process must be carried out in stages.

If Peg-out were to be reopened right now, it would mean the system would once again allow users to exchange L-BTC for real BTC, whereas the current public reserves are insufficient to cover all circulating L-BTC.

Thus, block recovery is only the first step, while restoring the 1:1 redemption is the real second hurdle.

What should the market really pay attention to next?

The current recovery logic for Liquid can be summarized as:

Fix the vulnerability → Restore block production → Verify network status → Restore reserves → Ultimately reopen Peg.

Among them, the three most important variables are:

First, whether the remaining 598.5 BTC can be recovered;

Second, whether the Federation can address the current reserve gap of about 15%;

Third, when Peg-in/Peg-out will reopen, and whether a complete security audit and incident review will be published before it reopens.

For L-BTC holders, these factors are even more important than "whether the network resumes block production."

The real issues left by this incident

The Liquid incident is gradually transitioning from a sudden security event to a stress test of cross-chain asset custody and validation mechanisms.

This attack did not directly crack the private keys but caused the system to release hundreds of millions of dollars in real BTC.

This indicates that in on-chain financial infrastructure, "not losing the key" does not mean that assets are necessarily secure.

What truly determines security also includes every link between asset issuance, proof verification, Peg mechanisms, and off-chain reserves.

Currently, Liquid has passed the most dangerous "network halt" phase, but there is still a ways to go before full recovery.

3,400 BTC have returned, and the network has resumed block production; next, the market is waiting for the remaining 600 BTC and that 1:1 BTC/L-BTC exchange channel.

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