The Liquid Network has restarted normal operations but remains unable to process Bitcoin redemptions. Peg-outs—the process of converting Liquid Bitcoin (L-BTC) back into Bitcoin—remain suspended while the sidechain's reserve sits approximately 603 BTC short of full backing.
Liquid has stated that redemptions will not resume until the reserve fully backs every L-BTC in circulation and security reviews are complete.
How the Reserve Was Depleted
On September 6, 2026, a bug in Elements, the software underlying Liquid, allowed unauthorized creation and redemption of L-BTC. The exploit resulted in approximately 3,996 to 4,000 BTC leaving the federation reserve, valued at around $320 million at the time.
The federation reserve had held roughly 4,205 BTC before the breach. At its lowest point, the reserve contained just 197 BTC. White-hat actors returned approximately 3,400 BTC by September 7, but a shortfall of between 598 and 603 BTC remained unreturned. By mid-September, the reserve was covering about 86% of outstanding L-BTC supply.
The signing keys held by federation members and SideSwap's Peg-out Authorization Key were not compromised.
Current Network Status
Liquid restarted normal block production and user transactions on September 10, 2026. Users can send and receive L-BTC within the network. As of October 11, 2026, peg-outs remain on hold.
Other assets issued on Liquid, including USDT and tokenized real-world assets, were not affected by the exploit and have returned to normal operations.
Conditions for Resuming Redemptions
Liquid has outlined several requirements before peg-outs can restart:
- Full restoration of 1:1 BTC backing for L-BTC
- Upgrades to the Elements software
- Completed security audits
- Changes to key management, including a move to cold storage
Blockstream CEO Adam Back has assured stakeholders that the 1:1 peg will ultimately be fully covered. No specific date for resuming redemptions has been announced.
Implications for L-BTC Holders
The 86% reserve coverage creates immediate liquidity constraints for L-BTC holders. A token that cannot be redeemed for its backing behaves differently from one that can, even with promises of eventual repayment.
Liquid's decision to require full backing before reopening redemptions reflects a cautious approach. Restarting peg-outs at 86% coverage could trigger a rush to redeem, potentially leaving later claimants unable to access their Bitcoin.
