Liquid Network Hack Exposes Depegging Risks Worth Hundreds of Millions

The Liquid Network, a layer-2 privacy side chain built on top of Bitcoin, was hacked over the weekend, resulting in the theft of approximately $320 million worth of BTC.

According to reports, the hackers, who claimed to be 'whitehats', extracted 95% of the network's total reserves, amounting to around 4,000 BTC. However, they partially redeemed themselves by returning 85% (3,400 BTC or roughly $269.2 million) of the stolen funds.

The hackers exploited a software vulnerability that allowed them to print unbacked L-BTC tokens and redeem them for real Bitcoin. They demanded that Blockstream, the network's developer, deploy a patch and update to fix the issue as a prerequisite to fund restoration.

Following the hack, major exchanges like Bitfinex and platforms like Aqua wallet suspended all L-BTC deposits and withdrawals to contain the matter. The deficit means L-BTC could potentially trade at a discount to Bitcoin if the 600 BTC deficit remains uncovered, which could trigger a capital flight further cutting down the value of L-BTC.