Software cache flaw may explain $320 million Bitcoin loss from Liquid sidechain

Researchers investigating the loss of about $320 million in Bitcoin from the Liquid Network have pinpointed a possible software flaw in the sidechain’s transaction‑validation cache. The flaw could let attackers create L‑BTC tokens without the required one‑for‑one Bitcoin backing and redeem them for real BTC.

Potential cause: cache‑key collision in range‑proof verification

Liquid uses confidential transactions that rely on range proofs to ensure hidden amounts stay within valid limits. Because verifying these proofs is computationally intensive, nodes cache successful verification results. According to one technical account, an attacker could craft an invalid output whose proof produced the same cache key as a previously valid transaction. A node that retrieved the cached result would skip the necessary verification, allowing the inflationary output to be accepted.

Deployment questions

One source, Mononaut, claims the buggy code entered the Elements master development branch a week before the incident but never appeared in a tagged release. He says federation functionaries ran this code, while other nodes rejected the offending transactions. Blockstream has not confirmed these deployment details.

Transaction flow

Analysis of block 4,050,336 suggests an invalid transaction created roughly 3,996.0183 L‑BTC, which was later withdrawn through SideSwap’s peg‑out service on September 6, releasing about 3,996 BTC. Some nodes, including those powering the Liquid explorer, rejected the block containing the exploit, explaining discrepancies in transaction visibility across explorers.

Current status

The actors who withdrew the Bitcoin describe themselves as white‑hat hackers and have said they will return most of the funds once the bug is patched across affected nodes. No definitive confirmation of a full return or a completed software patch has been reported.

Key implications

• If federation nodes accepted the exploit while other nodes rejected it, the software version differences become central to the incident.
• Fixing the cache‑validation logic and ensuring consistent deployment across all nodes is required to prevent future inflation attacks.
• Restoring the Bitcoin reserves would resolve the shortfall in Liquid’s one‑for‑one backing model.