The Liquid Federation says it has restored full bitcoin backing for Liquid Bitcoin, closing the reserve shortfall created by a September software exploit. Liquid's public materials again describe every LBTC as backed one-for-one by bitcoin held on the main chain, while SideSwap reported matching reserves of about 4,270.54 BTC and 4,270.54 LBTC on November 3. The milestone repairs the financial backing of the Bitcoin sidechain's native asset, but it does not mean every recovery measure or withdrawal route has returned to its pre-incident state.

What full backing means

LBTC represents bitcoin moved into Liquid, a federated sidechain designed for faster settlement and confidential transactions. Under the intended peg, each LBTC in circulation corresponds to one BTC held by the Federation. Restoring that ratio means the reserve deficit has returned to zero and users no longer face an aggregate backing gap. It does not make LBTC identical to holding bitcoin directly: redemption still depends on Liquid's federation, software and operational controls, and ordinary users generally use a participating provider rather than executing a Federation peg-out themselves.

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The September shortfall

Liquid's incident assessment traced the September 6 breach to a flaw in Elements, the software underlying the network. A range-proof cache weakness allowed a transaction to create about 4,000 unbacked LBTC, which was then used to release roughly 3,996 BTC through SideSwap's authorized peg-out path. The attacker returned 3,400 BTC the next day, leaving approximately 600 BTC outstanding. Liquid later reorganized the invalid sidechain transactions, deployed Elements version 23.3.4 and resumed transaction processing, but the missing bitcoin left the circulating LBTC supply undercollateralized.

Deposits close the reserve gap

Independent reporting tracked a 50 BTC reserve deposit on October 28, followed by transfers of 300 BTC and 250 BTC in early November. The final transfer brought assets and liabilities back into balance. The Federation's announcement did not identify the contributor, but The Block reported that board member Samson Mow named Blockstream as the source of the replenishment. That distinction matters because replenishing the reserve protects LBTC holders while the unrecovered bitcoin attributed to the attacker remains a separate legal and asset-recovery issue.

Access is still being restored in stages

Users have been able to exchange BTC and LBTC through participating providers for several weeks. SideSwap says its peg-out service reopened on October 20 and pays customers from its own bitcoin wallet, which it refills manually. Direct Federation peg-outs remain unavailable, according to SideSwap's November 3 update. Liquid's October recovery plan said those withdrawals would return only after full backing and controlled reactivation for authorized key holders, so the reserve milestone satisfies one condition without proving that the final operational stage is complete.

What remains unresolved

The Federation has promised further changes to governance, oversight and technical safeguards, but it has not yet published the final framework or a timetable for normal Federation peg-outs. Users and institutions should watch for evidence that those controls have been implemented, audited and tested under live conditions. Full backing removes the immediate reserve deficit and is a material recovery step. The longer-term test is whether Liquid can preserve that backing, reduce operational concentration and provide transparent processes for handling another software or peg-out failure.

Sources

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