Blockstream Secures Liquid Network After $320 Million Exploit, Funds Set to Return

Blockstream announced on September 7 that it has patched its Liquid Network bridge nodes, allowing for the return of approximately 4,000 BTC, valued at around $320 million, that were fraudulently drained from the Liquid Federation wallet the previous day. The exploit was made possible by a bug in the Elements software that underpins the Liquid sidechain, enabling an attacker to execute a valid peg-out using invalid L-BTC, which the federation's automated systems failed to detect.

The attack exploited a vulnerability in the Elements code related to the Peg-out Authorization Key (PAK), which is responsible for converting L-BTC back into native BTC. Following the exploit, the Liquid Federation wallet's reserves plummeted from over 4,200 BTC to roughly 197 BTC, leaving L-BTC significantly under-collateralized. In response, Blockstream quickly disabled bridge nodes and paused network activity to prevent further losses.

Communication between Blockstream and the exploiter occurred through PGP-signed OP_RETURN transactions on the Bitcoin blockchain, allowing for secure messaging. The attacker expressed a willingness to return the majority of the stolen funds once the network was secured. As of September 7, approximately 3,998.5 BTC remained in the exploiter's wallet, with the slight difference attributed to transaction fees incurred during the exploit.

While the exploit severely impacted the BTC reserves backing L-BTC, other assets on the Liquid Network, such as USDT and DePix, were reported to be unaffected. The focus now is on the return of the stolen funds, which would enable Blockstream to restore L-BTC's collateral ratio and resume normal operations on the Liquid Network. Exchanges that halted L-BTC trading are expected to maintain those suspensions until the situation is fully resolved.

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Source: KLEA News