Liquid Network has moved closer to restoring peg out operations after starting an independent external security audit of Elements v23.3.4 as part of its recovery process. According to the network's Sept. 28 ecosystem update, the audit is underway as part of work to safely restore peg outs following the September security incident. The Liquid Federation is simultaneously updating its Peg out Authorization Key (PAK) list, with existing entries being replaced and federation working to ensure all Bitcoin receiving keys associated with peg outs are properly secured in cold storage.
The security work follows the September 6 exploit that led to roughly 4,000 BTC being withdrawn from the federation reserve. As reported by crypto.news, the attacker created approximately 4,000 unbacked LBTC and used Liquid's normal peg out process to withdraw Bitcoin from the federation reserve. The incident exposed weaknesses in both the Elements consensus vulnerability and configuration gaps in one federation member's PAK signing process. SideSwap, a Liquid Federation member, received roughly 4,000 LBTC through its service before federation signers released approximately 3,996 BTC on Bitcoin.
Elements v23.3.4 was released earlier this month to address the software flaw exploited during the September incident. According to Liquid's assessment, the vulnerability involved the way Elements cached the results of rangeproof verification, with an earlier change removing some transaction context from the cache key, creating a consensus flaw. The attacker exploited a second weakness involving how fields were combined in the cache key, creating an output whose value was not backed by its inputs. Elements v23.3.4 changed how rangeproof and surjection proof cache keys are constructed by serializing each field with a length prefix, preventing different sets of inputs from producing the same cache key through collision methods.
Under Liquid's architecture, PAK entries contain two keys with separate functions - an offline component derived from a member's Bitcoin receiving wallet and an online key that signs peg out requests. Functionary nodes use the offline component to verify Bitcoin destinations, while the online component operates on an Elements node to sign requests for Bitcoin release. Liquid's incident assessment noted that the offline wallet arrangement provides protection if upstream systems fail, with Bitcoin remaining in cold wallets requiring separate actions for movement. The federation is now replacing existing PAK entries and ensuring relevant peg out keys are held in cold storage before withdrawals resume.
Normal transaction activity returned earlier in September, but the Bitcoin peg has remained subject to restrictions during the recovery process. Liquid initially halted bridge nodes on September 6, with block production resuming on September 9 using the corrected chain. Peg outs stayed disabled throughout these stages, with approximately 602 BTC remaining subject to recovery efforts according to Liquid's latest assessment. The network did not provide a date for withdrawals to restart, stating that the audit and PAK changes are steps toward resuming secure peg out operations, with another update on the restoration process expected shortly.
