Liquid Network Bitcoin Heist: Whitehat Hackers Demand Bug Fix Before Returning Funds
A significant incident occurred on the Liquid Network, resulting in nearly $320 million in Bitcoin leaving its federation reserve through an abnormal peg-out process. The incident began on September 6 when a customer submitted 4,000 L-BTC to SideSwap's peg-out service, which converts Bitcoin represented on Liquid back into BTC on the main network. According to SideSwap, the request passed the normal authorization process and prompted the Liquid Federation to release about 3,996 BTC.
The actors controlling the Bitcoin subsequently identified themselves through on-chain messages as 'whitehats' and said they intended to return most of the funds once the underlying bug had been fixed across the network. Blockstream traced the 4,000 L-BTC presented for redemption to a flaw in Elements, the software underlying Liquid.
Liquid is designed to maintain one BTC in its federation reserve for every L-BTC in circulation. During a normal peg-out, L-BTC is burned, and an equivalent amount of Bitcoin is released. In this case, SideSwap says a software bug created L-BTC without corresponding Bitcoin backing.