White‑hat holder retains $320 million in Bitcoin after Liquid Network bug drains federation reserve

On September 6, a customer requested a peg‑out of 4,000 L‑BTC through SideSwap, triggering the release of about 3,996 BTC from Liquid’s federation reserve. The Bitcoin was transferred to an address holding roughly 3,998.5 BTC, after which Liquid disabled its bridge nodes and SideSwap halted all swaps.

How the withdrawal occurred

SideSwap reports that the request passed normal authorization using a valid Peg‑out Authorization Key (PAK). Liquid says no signing keys were compromised. Instead, Blockstream traced the issue to a software bug in Elements, the codebase that powers Liquid. The bug allegedly created L‑BTC without the required one‑for‑one Bitcoin backing, allowing the tokens to be burned in a standard peg‑out while real BTC was released.

Scope of the failure

Bitslab identified that at least 11 of Liquid’s 15 federation functionaries signed the transaction, indicating a systemic validation error rather than a single key compromise. The flaw allowed an invalid state to be accepted as legitimate across multiple signers.

White‑hat response

The holder of the Bitcoin announced on‑chain via OP_RETURN messages that they intend to return most of the funds, but only after Blockstream confirms the bug is fixed and all nodes are patched. Blockstream has been in contact with the holder, requesting coordination with its security team.

Next steps for Liquid

Liquid must develop and distribute a patch for the Elements flaw, verify that no further invalid L‑BTC can pass the peg‑out process, and reconcile its reserve to ensure that remaining L‑BTC remain fully backed. Bridge nodes remain disabled while these actions are undertaken.