How 4,000 BTC walked out of Blockstream’s Liquid Network

Roughly 4,000 BTC, worth about $320 million left Blockstream’s Liquid Federation wallet after it was hacked on Sunday afternoon.

Eleven of the federation’s 15 keys signed the transaction, even though the Liquid Network tokens that redeemed the BTC should never have existed. 

The attacker’s address, which still held 3,998 BTC by Monday morning, published an OP_RETURN message reading, “we are whitehats. contact us on chain.”

An hour later, a second address answered, “Please contact [email protected].” A follow-up message from the hacker allegedly offered a Signal handle for further communication.

SideSwap, whose peg-out service processed the order, blamed the incident on faulty Liquid Bitcoin (LBTC) originating from a third-party “Elements bug,” denying responsibility of “any SideSwap system.”

Liquid Network confirmed the incident shortly after 4:25pm New York time, saying, “Effectively, the Liquid sidechain is paused until this issue is resolved,” with bridge nodes disabled and exchanges suspending LBTC deposits and withdrawals.

Mempool.space, itself a Liquid federation member, logged “an unauthorized -4019 BTC withdrawal” in its real-time audit of federation holdings.

Liquid.net, the Liquid Network’s official dashboard, didn’t immediately reflect the loss. Mempool.space’s Liquid.network promptly showed the loss.

Bitcoin Core contributor Antoine Poinsot further supported Mempool.space’s position, noting, “Liquid block 4’050’336 was rejected by @mempool but accepted by @Blockstream.

“This is the block that contains the peg-out transaction.”

Read more: Bitcoin bridge Boltz suspends services as AI hacks outpace patches

All 83 inputs to the drain transaction were spent with exactly 11 valid signatures on the federation’s 11-of-15 branch.

The network’s emergency path — two of three backup keys plus 8,064 blocks of waiting, roughly 56 days — was bypassed entirely.

Instead of attempting an emergency override, the clever hacker simply used a regular peg-out request, and because they had enough signatures, it worked.

The coins left through SideSwap’s peg-out authorization key, or PAK, which Liquid Network claims “was not compromised, nor were any others.”

Liquid runs that PAK check in Elements, an open-source fork of Bitcoin Core maintained largely by Blockstream. Its public commit log carries a run of validation fixes from the first week of September.

One, authored on the morning of September 1, is titled, “Validation: always validate and retain dynafed header block_height.”

The commit message notes that prior to the always validate change, “a dynafed header with a mismatched height could be accepted.”

Protos couldn’t establish that this was the bug that the hacker used.

Others blamed AI. Three days before the 4,000 BTC drain, OpenAI released GPT-6 Astra. OpenAI rated it as its first model able to find unknown vulnerabilities and exploits, unaided. 

Mempool.space runs Liquid.network, which reported 4,205 ostensibly BTC-backed LBTC tokens outstanding against just 197 BTC of actual reserves, under 5% backing.

The two dashboards diverged once before, in January.

Back then liquid.network briefly showed 3,463 BTC behind 4,199 LBTC, and Adam Back blamed mempool.space for stale node software. This time, mempool.space was more accurate that the Liquid Network’s official Liquid.net dashboard.

Casa security chief Jameson Lopp posted, “Looks like the Liquid functionary codebase hasn’t been touched in two years, which isn’t a good sign.”

The public repository for that code last received a commit on April 19, 2024. That was two years and four months before 95% of the BTC it guards walked out the door.

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