Liquid Network has restarted block production in a limited mode after halting operations following a roughly $320 million Bitcoin withdrawal tied to a flaw in the Elements software that underpins the sidechain. The network said functionary nodes are again signing and validating blocks after receiving emergency updates, but regular transactions and Bitcoin peg-ins and peg-outs remain suspended.
The partial restart is intended to let operators monitor the updated system before broader services return. Liquid has not given a date for reopening transfers or bridge activity, and it said restrictions will remain in place while it works to restore the Bitcoin reserve backing L-BTC on the network.
Limited restart leaves transfers offline
In a Thursday update, Liquid said the network was producing blocks again “without transactions,” meaning users still cannot send standard transactions or move funds between Bitcoin and Liquid. The same pause applies to peg operations, including withdrawals approved through Peg-out Authorization Keys, or PAKs.
Liquid said functionary and bridge nodes had received the required software changes before block signing resumed. The network described the decision to keep transactions disabled as a way to confirm that the system has fully stabilized before any other functions are restored.
How the withdrawal happened
The shutdown followed the creation of unbacked L-BTC through a proof-verification flaw in Elements, the open-source software used by Liquid. According to previous reporting cited by the network, the actor used that weakness to mint L-BTC without first locking the equivalent amount of Bitcoin in the federation wallet, then sent the tokens through SideSwap’s authorized peg-out service.
That process led the federation to release about 3,996 BTC. Liquid previously said the withdrawal reduced the federation wallet from around 4,205 BTC to about 202 BTC, meaning roughly 95% of the Bitcoin held there at the time was removed. SideSwap said a customer had submitted 4,000 L-BTC to its peg-out service and that the request was processed through its normal system. Both Liquid and SideSwap said the authorization key used in the transaction was not compromised.
Liquid’s federation relies on 15 rotating functionaries and requires 11 signatures to move funds from its multisignature wallet, according to an earlier technical account of the incident. No federation signing key was reported stolen; the issue was instead the software logic used to determine whether redeemed L-BTC was valid.
Emergency patch changes proof verification
One day before block production resumed, Liquid released Elements v23.3.4 as an emergency update tied to the flaw. The change modifies how the software verifies and stores confidential transaction range-proof results.
Range proofs are used in Liquid’s confidential transactions system to confirm that a hidden amount is valid without revealing the amount publicly. Liquid said the affected software cached successful proof-verification results so nodes could reuse them, but earlier reporting found that the cache lacked enough transaction context, allowing a valid result to be replayed where it should have failed.
Version 23.3.4 hardens the cache keys used for those range proofs, according to the network. Functionary and bridge nodes were updated before the restart, though operators are still withholding transactions while they check the deployment.
Most of the Bitcoin has been returned
Blockstream and the actors communicated through messages embedded in Bitcoin transactions. In one message, the actors said they would return the assets after vulnerable nodes had been repaired. Blockstream later sent a signed message stating that its bridge nodes had been patched and that the Bitcoin was “safe to return.”
After that exchange, 3,400 BTC was sent back to the federation wallet. Liquid said the repayment restored about 85% of the withdrawn funds. About 598.5 BTC remained in the withdrawal-linked address afterward.
No public agreement has identified the remaining balance as an approved security bounty. The actors have not publicly said whether they intend to return more, and Blockstream has not announced terms that would allow them to keep the outstanding amount.
What remains unresolved
Liquid is a federated Bitcoin sidechain launched by Blockstream in 2018 using Elements software. Under normal operation, users lock BTC into the federation-controlled peg and receive L-BTC on Liquid, which can later be burned through the peg-out process to release the corresponding Bitcoin on the base layer.
For now, that bridge remains unavailable. Until peg services are restored and the reserve situation is resolved, L-BTC holders cannot use the standard process to redeem L-BTC for native Bitcoin. The next confirmed step is continued monitoring of the patched network while block production continues with transactions still disabled.
Source: crypto.news