Liquid peg-outs still paused five weeks after the exploit; about 602 BTC still missing
Victoria Shinder2 min readBitcoin holders on the Liquid sidechain still cannot redeem LBTC for BTC. As of 12 October the Liquid blog carries the banner "LBTC peg-out operations remain paused", more than five weeks after an attacker drained most of the federation's bitcoin reserve on 6 September. Transactions on Liquid itself resumed after a corrected chain was restarted; the exit to Bitcoin did not.
What happened. Blockstream's incident assessment, first published on 23 September, says that at 13:53 UTC on 6 September a single transaction exploited a flaw in how Elements — the software Liquid runs — caches rangeproof verification results. The transaction created about 4,000 LBTC with nothing behind it. Thirty-six minutes later the unbacked tokens had been redeemed through SideSwap, a federation member with peg-out rights, for about 4,000 real BTC. Smaller peg-outs took the reserve from about 4,205 BTC to 197 BTC before bridge nodes were halted at 18:26 UTC. The attacker identified themselves on-chain and returned 3,400 BTC on 7 September; about 602 BTC remain outstanding. Other Liquid assets, including USDt, were not affected.
Two bugs, not one. "Bug A" dates from a 2018 change that dropped the asset commitment and script from the cache key, so a cached "valid" result could be reused in a context where the proof was not valid. It was reported and fixed this summer; by 11 August, 13 of 15 functionaries ran the fix. The fix itself introduced "Bug B": fields were concatenated into the hash without length prefixes, so a deliberately aligned byte sequence could collide with an earlier cached entry. Blockstream says manual review, AI-assisted review and the external researcher's own analysis all missed it. Only nodes whose caches held the matching entry accepted the bad block.
The second failure. Peg-outs require a Peg-out Authorization Key. The federation charter says the signing wallet should be kept offline so that released BTC sits in cold storage for a while — a window to catch exactly this. According to the assessment and SideSwap's own statement, SideSwap kept its peg-out signing key online, forwarded BTC to the customer in the same block, and applied no size limit or velocity check, so a request for a large share of all LBTC went through without review.
The fix and the open question. Elements v23.3.4, a hardened release, shipped within days. Block production resumed; peg-outs stayed disabled pending the final recovery stage. Blockstream has not published a date for reopening them, and with the reserve short by roughly 600 BTC, how the gap will be covered before redemptions restart is the question users are waiting on.
Source: Liquid Network, security incident assessment — https://blog.liquid.net/liquid-network-security-incident-assessment/