Liquid Network Wipes Out $320M in Bitcoin Due to Node Software Bug

A bug in the Elements node software used by Blockstream's Liquid Network has resulted in the loss of nearly $320 million worth of Bitcoin. On September 6, a customer submitted 4,000 Liquid Bitcoin (L-BTC) to SideSwap, a decentralized exchange built on Liquid. Twenty-three minutes later, 3,996.01834922 BTC left the federation's multisig reserves on the Bitcoin mainnet through a Peg-out Authorization Key.

The bug apparently circumvented the safeguards of the network's 11-of-15 federation model, which requires 11 out of 15 designated entities to sign off on peg-outs. The remaining L-BTC in circulation should still be backed 1:1 by BTC due to a corresponding burn before the Bitcoin left the reserves.

The incident has raised concerns about the network's ability to handle redemption demand if peg-outs reopen, with only approximately 197 BTC sitting in federation reserves. Blockstream attributed the withdrawal to the bug and not an external hack or compromised key.