White-hat Holds $320M in Liquid Bitcoin, Demands Fix

On Sept. 6 a customer submitted 4,000 L‑BTC to SideSwap’s peg-out service. SideSwap says the request passed its usual authorization checks and the Liquid federation released about 3,996 BTC. The withdrawn coins later moved to an address that currently holds roughly 3,998.5 BTC. The actors controlling that address identified themselves on‑chain as white‑hats and are holding the funds.

SideSwap and the Liquid federation say no signing keys were stolen. The peg‑out used SideSwap’s valid Peg‑out Authorization Key and Liquid reports no compromise of federation keys. Blockstream traced the presented 4,000 L‑BTC to a flaw in Elements, the software that issues Liquid tokens. According to that tracing, Elements created tokens without corresponding Bitcoin backing; those unbacked L‑BTC entered a normal peg‑out flow and were treated as valid by federation functionaries, which led to the release of real BTC.

Blockchain security firm Bitslab reported that at least 11 of Liquid’s 15 functionaries signed the transaction. That pattern points to a failure in state validation: if every signer is shown the same invalid account state, valid signatures can still authorize a transfer. After the withdrawal, Liquid disabled its bridge nodes and SideSwap suspended swaps, peg‑ins and peg‑outs. Several exchanges paused or stood ready to pause L‑BTC deposits and withdrawals while operators investigated.

The holder communicated via on‑chain OP_RETURN messages. Blockstream first asked the holder to contact its security team, and the holder replied it planned to return “most” of the Bitcoin but wanted the bug fixed and every node patched before doing so, according to Galaxy Digital research head Alex Thorn.

The federation faces several operational steps before funds can be returned and reserves reconciled. Developers must identify and fix the Elements flaw, distribute the patch to all affected nodes and verify that no further invalid L‑BTC can be created and presented for redemption. In the peg‑out, the L‑BTC presented for redemption was burned, but about 3,996 BTC left the federation wallet. Until those bitcoins return or other accounting adjustments are made, Liquid cannot demonstrate a one‑for‑one backing of outstanding L‑BTC.

No independent technical postmortem or detailed patch description has been published. Liquid’s bridge nodes remain disabled while developers and federation members work on remediation and reconciliation.