Liquid Network: Blockstream’s bitcoin sidechain, L-BTC and the September 2026 hack

The Liquid Network, the federated Bitcoin sidechain that Blockstream launched in 2018, is running again after the September 2026 hack, but only in part. Since 20 October holders can swap L-BTC for bitcoin through swap providers. Direct peg-outs to the Bitcoin chain are still shut, and the reserve holds less bitcoin than there is L-BTC in circulation.

At 18:21 UTC on 21 October 2026 the liquid.network explorer showed 4,234.76 L-BTC outstanding against 3,632.23 BTC in the Federation’s wallet on Bitcoin. That is a gap of about 602.5 BTC, or roughly 86% backing. Bitcoin.com printed the same two figures on 17 September, so neither has moved in five weeks.

The gap is what is left of the attack of 6 September. A bug in Elements, the software Liquid runs on, let an attacker create about 4,000 L-BTC that nothing backed and redeem them for 3,996.02 BTC, about $320 million at the time according to CoinDesk. The attackers, who call themselves “whitehats”, sent 3,400 BTC back the next day. Our report on the staged recovery announced on 20 October covers the latest step. Who bears the loss has still not been said.

What is the Liquid Network?

Liquid is a separate blockchain that runs next to Bitcoin. It is built on Elements, open-source code derived from Bitcoin’s and published under the MIT licence, and its base coin, L-BTC, stands for bitcoin locked in a wallet on the main chain. Blocks come about every minute instead of every ten. Amounts and asset types are hidden by default, and anyone can issue tokens on it, from Tether’s USDt to tokenized mining notes.

Liquid’s documentation calls it a federated sidechain of Bitcoin, while the liquid.net site describes it as a Bitcoin layer-2. The first label is the accurate one. Liquid is not a rollup, nor a payment-channel network like Lightning: its safety rests on its signers and on Blockstream’s code, not on Bitcoin’s own consensus. Our layer 2 explainer sets out the difference.

Three parties are easy to confuse. The Liquid Federation governs the network; it had 87 members on six continents on 1 May 2026, from exchanges and trading desks to wallet makers. Fifteen functionaries run the signing nodes. Blockstream, the Bitcoin company Adam Back co-founded in 2014, writes the software and operates liquid.net as the Federation’s technology provider. The pages we read do not say which members are the 15 functionaries.

How the Liquid Network works: functionaries, blocks and the bridge

There is no mining and no block reward. The functionaries produce blocks on a fixed schedule of about one minute, and the Liquid docs set the signing quorum at 11 of 15. The same threshold secures the Federation’s bitcoin wallet, according to Blockstream’s help centre, with each functionary’s key held in a hardware security module.

That wallet is the bridge between the two chains: every L-BTC is supposed to match one BTC sitting in it. Like any cross-chain bridge, it is a pile of locked coins guarded by keys and by the software that decides when to release them. In September the keys held. The software did not.

Peg-in and peg-out: moving between BTC and L-BTC

The docs set no eligibility rule for a peg-in. You send BTC to a Federation address, wait for 102 Bitcoin confirmations (about 17 hours) and claim the same amount of L-BTC on Liquid.

Peg-outs are narrower. Only functionaries and participants with a registered peg-out authorisation key, or PAK, can redeem L-BTC for BTC directly, which normally takes 11 to 35 minutes. Everyone else goes through a Federation member, an exchange or a swap service. SideSwap, a swap platform and Federation member, held one of those keys, and the attacker went through it.

Pegs are a small share of the traffic. In the first quarter of 2026 the Federation counted 14,063 peg-ins for 1,252 BTC and 1,201 peg-outs for 1,144 BTC, out of more than 1.16 million transactions.

Emergency keys and timelocks

If the functionaries stop signing, a separate set of emergency keys held by Blockstream in cold storage can move the reserve, but only after a timelock lapses. Blockstream’s help centre puts it at 4,032 Bitcoin blocks, about 28 days. In 2020 Blockstream described those keys as 2-of-3 and said they had never been accessed.

The fallback was exposed by accident in June 2020. James Prestwich, founder of Summa, disclosed on 26 June that the timelock on an output holding 870 BTC had lapsed, for 40 minutes by Blockstream’s count, so the emergency keys could in theory have spent it. “This was not normal operation,” he told Cointelegraph. No coins moved. Blockstream patched the functionary software to refresh timelocks seven days before they expire and named Dynamic Federations as the full fix.

Dynamic Federations, or DynaFed, let the Federation add or remove functionaries without stopping the chain, raise the cap of 15, reassign or disable the emergency keys and lengthen timelocks. In a July 2021 progress report, six of the 12 functionaries needed for the hard fork were signalling for it.

L-BTC: a 1:1 claim on bitcoin, now about 86% backed

L-BTC is created when BTC enters the Federation wallet and destroyed when BTC leaves it, so supply should always equal the reserve. That rule is the product, and it is what the September bug broke.

Liquid has no other native token: no governance coin, no staking, no emission schedule. L-BTC is also the only asset accepted for fees. A proposal to let users pay in other assets (ELIP 204) was under review by the Federation’s Technology Board in May 2026. Fees are small: liquid.net showed an average of 0.1 sat/vB on 21 October, and ELIP 200, announced in January 2025, cut confidential-transaction fees by up to 90%.

Can L-BTC be turned back into bitcoin today? Through a swap provider, yes, since 20 October. Through a peg-out, no, and no date has been given. We found no published rate for those swaps against 1:1, so we do not quote one. On price sites the “LBTC” ticker usually means Lombard’s staked bitcoin, which CoinGecko lists under that symbol: a different asset.

Confidential Transactions and issued assets

On Bitcoin every amount is public. On Liquid, Confidential Transactions replace each amount and asset type with a cryptographic commitment, plus a range proof showing the hidden amount is valid without revealing it. The two parties see the figures; an outsider sees that a transaction happened, not what moved or how much.

That privacy sells to desks moving bitcoin between exchanges. It also made the September crisis hard to read from outside. The forged outputs looked like any other L-BTC, and the explorers disagreed on supply, which has to be inferred from peg accounting. About seven hours after the payout, Defiprime found Blockstream’s explorer showing about 197 L-BTC (the reserve left) and mempool.space about 4,205. On 21 October the two agreed again: Blockstream’s explorer counted 18,387.58 BTC pegged in, 14,142.80 BTC pegged out and 10.03 L-BTC burned since launch, which matches liquid.network’s supply figure to rounding.

Issuance needs no smart contract. Tether launched USDt on Liquid on 29 July 2019, first available on Bitfinex, and liquid.net listed it at $97 million on 21 October (our Tether (USDT) page covers the stablecoin itself). Blockstream unveiled Liquid Securities, a platform for security-token issuers, on 15 May 2019. On liquid.net’s own tally the largest assets are Mifiel promissory notes ($2.1 billion), BMN2 bitcoin mining notes ($877 million) and the USTBL token ($32 million).

Programmability came later. Simplicity, Blockstream’s smart-contract language, went live in alpha on Liquid mainnet on 31 July 2025, with a higher-level language called SimplicityHL. In the first quarter of 2026 the Federation counted 18,857 new asset issuances and 1,163,119 transactions, up 72% on the previous quarter, with a monthly high of 478,680 in March. Those counts include issuance and small asset transfers, so they measure activity, not value.

Liquid Network in numbers

The on-chain figures below come from the explorer interface behind liquid.network, read at 18:21 UTC on 21 October 2026 (Liquid block 4,110,629). The rest carries its own date and source.

Measure	Figure	Date and source
L-BTC in circulation	4,234.76 L-BTC	21 Oct 2026, Liquid explorer
Federation reserve on Bitcoin	3,632.23 BTC	21 Oct 2026, Liquid explorer
Shortfall	602.53 BTC (85.8% backed)	21 Oct 2026, our calculation
Peg-ins since launch	117,346, for 18,387.58 BTC	21 Oct 2026, Blockstream explorer
Peg-outs since launch	10,414, for 14,142.80 BTC	21 Oct 2026, Blockstream explorer
Reserve peak (monthly series)	4,406.59 BTC	February 2026, liquid.network
Federation members	87	1 May 2026, Liquid Federation
Self-reported value on Liquid	$5 billion	21 Oct 2026, liquid.net

The monthly series on liquid.network is indicative, but it shows the shape of the year: net peg-outs every month from May to August 2026, a reserve of 4,216.62 BTC in the August reading, then 3,632.23 BTC in September. In October 2024, when it announced a convertible note, Blockstream put the bitcoin locked in Liquid at more than 3,844 BTC and the assets issued on it at over $1.8 billion.

No independent tracker measures the value held on Liquid. DefiLlama lists neither a Liquid chain nor a Liquid protocol (its entry called “Liquid” is an unrelated Hyperliquid trading interface), so the only figure is Liquid’s own: $5 billion on liquid.net on 21 October, against $3.27 billion claimed on 22 May 2025. The largest line, $2.1 billion of Mifiel notes, is a tokenized receivable, not liquidity anyone can trade. DefiLlama does list the hack: $320 million on 6 September 2026, filed under bridge and cross-chain, technique “Unbacked Cross-Chain Mint”.

Liquid Network history, 2018 to 2026

Liquid opened on 10 October 2018 with 23 members, among them Bitfinex, BitMEX, Bitso, OKCoin, Xapo and SIX Digital Exchange. “It’s ready for commercial use,” Samson Mow, then Blockstream’s chief strategy officer, told CoinDesk that day.

Date	Event
10 Oct 2018	Public launch with 23 Federation members
15 May 2019	Blockstream unveils Liquid Securities, a platform for security-token issuers
29 Jul 2019	Tether launches USDt on Liquid
26 Jun 2020	Timelock lapse on an 870 BTC output disclosed; no funds lost, software patched
28 Jul 2021	Dynamic Federations progress report: 6 of 12 required functionaries signalling
24 Aug 2021	Blockstream raises $210 million at a $3.2 billion valuation
15 Oct 2024	Blockstream raises a $210 million convertible note
16 Jan 2025	ELIP 200 cuts confidential-transaction fees by up to 90%
20 May 2025	Federation reaches 81 members and elects three boards
31 Jul 2025	Simplicity alpha goes live on Liquid mainnet
29 Jan 2026	Seven new Federation members
11 May 2026	Blockstream publishes a Liquid development roadmap
2 Aug 2026	Outside researcher reports the 2018 cache flaw
6 Sep 2026	Exploit: about 4,000 unbacked L-BTC pegged out for 3,996 BTC
7 Sep 2026	3,400 BTC returned
9-10 Sep 2026	Patched Elements released, blocks and transactions resume
25 Sep 2026	Liquid publishes its security incident assessment
20 Oct 2026	BTC and L-BTC swaps reopen through providers; peg-outs stay restricted

The Liquid Network hack: how a cache bug minted L-BTC

This section draws on Liquid’s security incident assessment, dated 25 September 2026, unless another source is named.

Two bugs in the range-proof cache

Checking a range proof is expensive, so Elements keeps a cache of proofs it has already verified. The first flaw, “Bug A”, dates from a change written on 25 April 2018, merged on 30 May and shipped in Elements v0.14.1. It built the cache key from the nonce, the range proof and the value commitment, but left out the asset commitment and the output script. A cached “valid” was therefore not tied to the whole output it vouched for.

An outside researcher, stutxo, reported Bug A on 2 August 2026. Blockstream fixed it on the bridge nodes the next day, a Bitcoin Red Team engagement reported the same flaw with a working proof of concept on 7 August, and 13 of the 15 functionaries had updated by 11 August. The public fix was merged on 1 September.

That fix contained “Bug B”, the one that was exploited. It added the missing fields but joined the raw bytes of four fields with no length prefixes. Two of them, the proof and the script, vary in length, and the proof’s own length header is only checked in a full verification, which the cache skips. An attacker could therefore shape a proof and a script whose combined bytes matched an entry already cached as valid. Nodes holding that entry accepted the block; nodes without it rejected it. The chain split along cache contents, although all 15 functionaries ran the same build.

Timeline of 6 and 7 September (UTC)

• At 13:53:10 the exploit transaction landed in Liquid block 4,050,336, creating L-BTC that no input backed.
• At 14:00 the attacker tested the route with a 2.5 L-BTC peg-out through SideSwap, then deposited about 4,000 L-BTC with SideSwap at 14:05.
• Blockstream’s monitoring reported a stall in block production internally at 14:10.
• At 14:28:56 the Federation released 3,996.02 BTC in Bitcoin block 965,783.
• Researcher @ErgoBTC posted the peg-out transaction at 18:23 (per Defiprime), and the bridge nodes were halted at 18:26.
• At 18:30 the attacker wrote in a Bitcoin transaction: “we are whitehats. contact us on chain.” Blockstream replied on-chain at 19:31, pointing to its security address, and disclosed the incident at 20:25.
• On 7 September Blockstream patched the bridge nodes at 01:09. According to The Block, the attacker had asked it to fix the bug first, and Blockstream answered in a PGP-signed on-chain message: “Bridge nodes are patched, safe to return the funds.” 3,400 BTC came back at 16:09:25.

The bitcoin left the reserve 36 minutes after the forged block and about four hours before the halt. The peg-out was confirmed “well before” Blockstream could coordinate the halting of the bridge nodes, the assessment says.

What was not compromised, and SideSwap’s part

No key was stolen. “The Liquid Federation functionaries were not hacked, and no private keys were compromised,” Liquid said, as quoted by Decrypt. SideSwap’s PAK was not forged either: it signed a genuine peg-out request for L-BTC that consensus had wrongly accepted. USDt and the other issued assets were not affected, Decrypt and CoinDesk reported, though they could not move while the chain was paused.

SideSwap’s setup made the payout fast. The assessment, relying on SideSwap’s own account, says the platform kept its peg-out signing key online although the Federation Charter requires it to be offline, forwarded payouts automatically in the same Bitcoin block, and applied no size, velocity or wallet-history limits and no manual review.

The repair took four days. Bug B was fixed in Elements pull request #1600 on 8 September, and Elements v23.3.4 followed on 9 September with length-prefixed cache hashing and an option to switch the cache off. Block production resumed at 21:05:10 UTC that day with a replacement block 4,050,336. Valid transactions were replayed; the two invalid outputs and four descendants were removed. User transactions came back from 12:31 UTC on 10 September. Peg-outs did not.

The on-chain negotiation and the disputes

About 598.5 BTC stayed with the attackers, according to Decrypt and Bitcoin.com; Liquid’s assessment puts the outstanding amount at about 602 BTC. The roughly 4 BTC difference has no confirmed explanation. The attackers have not been identified, and “white hat” is their own label.

Bitcoin Magazine reported on 20 October that the attackers threatened to reveal Blockstream’s encrypted messages unless paid 10% of the bitcoin as a bounty, which would be about 400 BTC. SlowMist, as reported by KuCoin News on 11 September, said Blockstream rejected the demand, and Bitcoin.com wrote on 17 September that Blockstream refuses to pay and wants the 598.5 BTC back. “It is not clear if Blockstream reached a settlement with the hackers in private,” Bitcoin Magazine wrote.

The second dispute is about warnings. Calle, a co-lead of the Bitcoin Red Team, posted that it “only costs you 600 BTC to ignore an email from the red team”, Bitcoin.com reported on 11 September. Blockstream denied ignoring warnings, and Adam Back said the bug came from “an incorrect bug fix, to an AI-found bug”. The assessment confirms the Red Team engagement reported the root cause on 7 August, a month before the exploit. Our review of Q3 2026 crypto hacks places Liquid among the largest losses of the quarter.

Liquid Network peg-out: what has to happen before it reopens

The Federation’s staged recovery update of 20 October says the Federation, Blockstream and outside security experts spent several weeks hardening the network, refactoring its accounting and testing safeguards. New reserve-management software fits what the post calls the “post-incident accounting state”, and enough functionaries have installed it to move to the next phase.

That phase is the swap service now running: semi-automated BTC and L-BTC swaps with participating providers, “without protocol-imposed volume limits on this service”. The post names no provider; a post by Adam Back embedded by Bitcoin Magazine points to SideSwap for main-chain bitcoin and Aqua for Lightning. “Multiple independent safeguards remain in place to prevent premature or unauthorized peg-outs,” the Federation writes.

The final phase has two steps in a fixed order: restore full 1:1 backing, then reopen peg-outs for PAK holders once the remaining security and operational work is done, with reserves monitored openly through block explorers. The post gives no date, no figure and no word on the unreturned bitcoin. An earlier Liquid update of 29 September, reported by Bitcoin.com on 11 October, listed three steps toward peg-outs: an independent audit of Elements v23.3.4, a refreshed PAK list and all peg-out keys in cold storage.

Who covers the 602 BTC gap: not stated

Neither the assessment nor the 20 October post says whether Blockstream, the Federation, SideSwap or L-BTC holders will absorb the shortfall, or when. Bitcoin.com reported on 17 September that Blockstream says the peg will be covered 1:1 in a later step, and that Back told holders not to sell L-BTC over the counter at a discount. No compensation plan has been published.

Team, governance and funding

Adam Back, co-founder and chief executive of Blockstream, is the company’s public voice on Liquid and on the hack. Michael Minkevich, who joined as chief operating officer in October 2024, is Blockstream’s president and COO. Blockstream’s leadership page names no executive in charge of Liquid. Samson Mow, Blockstream’s former strategy chief and now head of JAN3, the company behind the Aqua wallet, often comments on Liquid but does not speak for it.

Governance is in transition. In May 2025 the Federation, then 81 members, elected three boards (oversight, technology and membership) of five seats each for one-year terms, separate from Blockstream. Liquid.net’s Federation page now says the three boards have been consolidated into a single interim board, without a date or names, and the assessment says further governance changes are under review.

The funding on record is Blockstream’s, not Liquid’s. Blockstream raised $210 million in a Series B at a $3.2 billion valuation in August 2021, led by Baillie Gifford and co-led by iFinex, the operator of Bitfinex, with part of the money earmarked for Liquid. In October 2024 it closed a $210 million convertible note led by Fulgur Ventures, for layer-2 work, mining and its bitcoin treasury.

Audits and code review

We found no published third-party audit of Liquid or Elements. Bug B got past an internal AI-assisted scan, a functional test on testnet and a second scan with human review, according to the assessment, and Alpen Labs took part in several rounds of review of v23.3.4 before its release. Blockstream says it is bringing in a rule that critical fixes to production consensus software get an independent auditor’s review before release, and the assessment announces a bug bounty programme.

Liquid said on 29 September that an independent external audit of v23.3.4 was underway, according to Bitcoin.com. The auditor has not been named, and no report had appeared by 21 October.

Lightning vs Liquid Network

Both move bitcoin faster than the main chain, with different trade-offs. Lightning keeps bitcoin on Bitcoin, locked in payment channels, and nobody has to trust a federation. Liquid moves bitcoin onto another chain with one-minute blocks, hidden amounts and issued assets, and asks users to trust 15 functionaries, Blockstream’s code and, as a last resort, Blockstream’s emergency keys. The two meet in practice: Aqua, the Lightning route for the swaps reopened on 20 October, handles both.

Liquid Network risks, and who it suits

Coindaro rates Liquid 4 out of 5 for risk: backing below 1:1, no date for peg-outs, a consensus bug that let unbacked coins reach real bitcoin, no published audit and governance under an interim board. It is not a 5 because no key was stolen, the forged transactions were removed, the patched software is out and the issued assets were untouched.

Liquid suits desks that move bitcoin between member exchanges and want privacy and quick settlement, and issuers who accept a federated trust model. It suits less anyone who needs a guaranteed way back to bitcoin on demand: the public never had direct peg-outs, and today nobody does. Bitcoin kept on Bitcoin, in a wallet you control, carries no bridge risk. This page describes risks; it is not advice to buy, sell or hold L-BTC.

What to watch next

The explorers will show first whether the 602 BTC gap is filled. Liquid still has to name the auditor of v23.3.4 and publish the report, refresh the PAK list and give a date for peg-outs. Then comes the roadmap Blockstream published on 11 May 2026, from zero-confirmation payments to a BitVM-style 1-of-n bridge: none of it has been updated since the recovery began.