Unidentified actors drained about 4,000 BTC, roughly $320 million at the time, from the Liquid Network federation wallet on September 6, and they did it without touching a single key.
Liquid Network said the funds left through SideSwap’s Peg-out Authorization Key, but neither that key nor any federation key was compromised, according to statements from Liquid Network and SideSwap. Instead, the tokens that triggered the peg-out appear to have been created out of thin air.
At 14:05 UTC on September 6, a customer sent 4,000 L-BTC to SideSwap’s peg-out service, which converts Liquid’s bitcoin-representative tokens back into Bitcoin on the main chain. SideSwap said it processed the order like any other: the L-BTC was burned on Liquid with a valid peg-out authorization, and 23 minutes later the federation paid out 3,996 BTC to the customer’s Bitcoin address. SideSwap said it had no way to tell those coins from any other L-BTC.
Blockstream, which built Liquid, has since established that the L-BTC in that order was created through a bug in Elements, the open-source software underpinning the sidechain. No independent technical postmortem has been published, so the Elements-bug attribution rests on Blockstream and SideSwap’s account. One outlet has reported that a fix for the bug was merged into the software five weeks before the incident; that claim is unconfirmed and Blockstream has not explained the bug publicly.
The internal controls held, on their face. The federation is a 15-member multisig, and 11 of 15 members must sign to move treasury coins. At least 11 functionaries signed the exploit transaction, meaning every signature was valid. The hardware security modules approved a withdrawal that looked ordinary because the consensus rules under which they operate had a hole in them. The result: roughly 95% of the wallet’s approximately 4,200 BTC reserves walked out through the front door.
The sidechain’s proof-of-reserves page showed a little over 207 BTC remaining after the incident, down from more than 4,200 before.
The actors consolidated the funds into a Bitcoin address ending in 6gyqjlte and left an OP_RETURN message reading “we are whitehats. contact us on chain.” They later told Blockstream, in on-chain messages: “Please fix the bug first. The chain is under risk at latest commit right now. Make sure every node is patched. Then we will transfer the money back safely after confirming the fix” . Blockstream has sent a PGP-signed on-chain message stating “Bridge nodes are patched, safe to return the funds” . Liquid itself calls the actors only “purported” white hats.
The money had not moved as of the latest reporting: roughly 3,998.5 BTC sat unmoved in the actors’ address as of 9:12 p.m. Pacific on September 7. “Most” of the funds is promised back; what share that means, and whether the promise holds, is unknown.
Liquid paused the network, disabling bridge nodes so no new transactions can be submitted. Exchanges have paused L-BTC deposits and withdrawals. Other Liquid assets, including USDT and DePix, were unaffected, as was Bitcoin’s main chain. Liquid has not said when the network will reopen.
