Liquid Network Breached as Hackers Withdraw $320 Million in Bitcoin

The Liquid Network, a federated sidechain of Bitcoin founded by Blockstream, has been breached. Alleged white-hat hackers withdrew approximately 4,000 BTC from the federation wallet that backs L-BTC. The hack exploited an inflation bug on the LBTC side chain, allowing the hackers to create over 4,000 non-existent LBTC and cash them out for on-chain Bitcoin.

The withdrawal was made using a peg-out transaction through the SideSwap Peg-out Authorization Key. The federation members' HSM security servers signed the BTC withdrawal transaction, worth around $320 million at the time.

The hackers moved the funds to an address ending in 6gyqjlte and promptly signed a new transaction with a message saying 'we are whitehats. contact us on chain.' A later OP_RETURN spend from the hacker address carried a message asking users to contact them via email or Signal.

Exchanges have been told to pause L-BTC deposits and withdrawals, while bridge nodes on the Liquid Network have been paused to limit access to the side chain.