Blockstream’s Liquid sidechain went offline Sunday after approximately 4,000 BTC—worth roughly $320 million—were withdrawn from the federation wallet that backs every L-BTC token in circulation. According to reporting by Decrypt, the funds departed through a valid peg-out authorization, leaving the wallet depleted to just 200 BTC, or about 5% of its pre-incident holdings.
The withdrawal mechanism itself functioned as designed. SideSwap, a federation member operating a peg-out service, confirmed it received 4,000 L-BTC at 14:05 UTC on Sunday, burned them under valid authorization, and processed a payout of 3,996 BTC twenty-three minutes later. The issue wasn’t a stolen key or compromised infrastructure—it was the creation of Bitcoin backing that never existed.
The Bug Behind the Bridge Drain
Liquid’s investigation quickly zeroed in on Elements, the open-source software framework powering the sidechain. Neither SideSwap’s peg-out authorization key nor any other federation key was compromised, the company stated. Instead, a vulnerability in Elements allowed someone to create L-BTC without corresponding Bitcoin collateral, then cash it out through what appeared to be a routine peg-out operation.
Blockstream had patched the bug five weeks prior—the fix was already in the codebase—but Liquid’s bridge nodes had not yet been updated to the corrected version when the exploit occurred. The sidechain remains paused while the company works through the implications.
An Unusual Negotiation Unfolds
The party behind the withdrawal left an on-chain message identifying themselves as white hats and requesting contact. Blockstream responded within the hour with an email address, and the two parties have since exchanged PGP-signed messages embedded in Bitcoin transactions.
The purported white hats offered to return most of the funds on one condition: patch the vulnerability and update every node before they relinquish control. Blockstream replied “Yes, thank you,” confirming the terms in the same block.
The framing triggered immediate skepticism from security researchers. Ledger’s chief technology officer Charles Guillemet initially questioned whether true white hats would drain a bridge and then demand conditions for its return, drawing parallels to the Ronin and Euler exploits. He hardened his stance when the condition appeared, suggesting the actors’ definition of “white hat behavior” had shifted to include theft followed by conditional restitution.
Samson Mow, Blockstream’s former security chief, tracked the exchange and estimated the hackers control approximately 3,998.5 BTC at the address they revealed.
Broader Ecosystem Remains Intact
Other assets tokenized on Liquid—including USDT, DePix, and real-world asset representations—were untouched. Bitcoin’s main network operated normally throughout the incident. The compromise was confined to Liquid’s federation wallet and the specific elements of its bridge mechanism.
Blockstream faces pressure to both patch the vulnerability and resolve the standoff with whoever holds the funds. The conditional return proposal, whether genuine white-hat disclosure or a negotiating tactic, has reset expectations around how bridge exploits are handled and what security remediation looks like under public scrutiny.