Liquid Sidechain Frozen After ‘White Hat’ Drains Bitcoin Reserve

Roughly 4,000 bitcoin, worth about $320 million, left the wallet that backs Liquid’s L-BTC token on Sunday, and the Bitcoin sidechain has been paused since. The withdrawal took about 95% of the bitcoin pegged into the network, which held roughly 4,200 BTC beforehand. Liquid said the parties responsible describe themselves as white-hat hackers.

Liquid settlement platform SideSwap, which processed the 4,000 BTC withdrawal, said the transaction was initiated at 14:05 UTC, the corresponding L-BTC tokens were burned on Liquid against a valid peg-out authorization, and the Liquid Federation paid 3,996 BTC to a Bitcoin address 23 minutes later. Liquid said SideSwap’s Peg-out Authorization Key was not compromised, nor was any other key. SideSwap said the L-BTC in that order had been created through a bug in Elements, the open-source software Liquid runs on, and that its service had no way to tell those coins from any other L-BTC.

Blockstream, Liquid’s technology provider, has been negotiating in the open. The two sides traded OP_RETURN messages through Sunday evening, with the party holding the funds asking whether it could return most of the coins to a federation address, then setting a condition: “Please fix the bug first,” adding that they “make sure every node is patched.” Blockstream’s reply of thanks, confirmed in the same block, answered the address question rather than the condition. Galaxy Digital research head Alex Thorn said the party also sent encrypted technical details to Blockstream. Ledger Chief Technology Officer Charles Guillemet questioned the white-hat framing, noting that legitimate researchers do not usually drain a bridge and then request talks onchain, and compared the episode to the 2022 Ronin bridge attack, though he later allowed that criminal groups rarely try to reach their victims either.

Exchanges have suspended LBTC deposits and withdrawals, and bridge nodes are disabled, so nothing new can enter the network, Liquid said. Other assets issued on Liquid, including USDT, DePix and tokenized real-world assets, were unaffected, they added. Liquid launched as a Bitcoin sidechain for faster, confidential transfers and asset issuance, with federation members securing the underlying bitcoin. As of Monday morning the coins had not left the receiving address.

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