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Blockstream’s Liquid disabled its bridge nodes on Sunday after almost the entire bitcoin reserve backing L-BTC was withdrawn to a single address, whose owner wrote “we are whitehats” into a bitcoin transaction.
By:The Defiant Team•
Security
Blockstream’s Liquid sidechain is paused after nearly all the bitcoin held in its federation wallet was withdrawn on Sunday, and the recipient identified themselves onchain as white hats.
Liquid said the money left through a working authorization key rather than a stolen one, which leaves the route into the peg unexplained. The wallet that backs every L-BTC in circulation now holds 197.47 BTC.
Two transactions moved it. The first, confirmed in block 965780 at 14:01 UTC, sent 2.5 BTC. The second, twenty-seven minutes later, sent 3,995.99999857 BTC. Both landed at bc1ql4mfu6aundtkksxklfajs2h3t9nzcd6gyqjlte, which now holds 3,998.49748445 BTC, worth about $319.5 million at bitcoin’s price of $79,901, per CoinGecko. Bitcoin was up 0.10% on the day.
We Are Whitehats
Four hours after the second withdrawal, the address consolidated the funds into a single output and attached a message in an OP_RETURN field: “we are whitehats. contact us on chain.” The same transaction sent 1,000 satoshis back to the federation wallet it had just emptied.
Blockstream answered onchain an hour later, paying 1,000 satoshis to the address with the message “Please contact security@blockstream.com.”
Liquid posted its account of the incident at 4:25 p.m. ET. “Purported white-hat hackers have withdrawn ~4,000 BTC (~$320 million) from the Liquid Federation wallet,” the network wrote. “What we know so far is that the funds were withdrawn, but that key was not compromised, nor were any others.”
Bridge nodes were disabled so no new transactions can be submitted, exchanges were told to pause L-BTC deposits and withdrawals, and USDT, DePix and other assets issued on Liquid are unaffected, the network said. “Liquid wallets will be impacted, and we’re sorry for any inconvenience,” it wrote. It did not describe the vulnerability.
Three Days To Change
The peg wallet is an 11-of-15 multisig, according to the spending script in the withdrawal transactions, and peg-outs are constrained a second time by the PAK list. Bitcoin can only leave to an address controlled by an authorized user, and, per Liquid’s documentation, “it takes three days to update the PAK list. This allows the network to detect an attacker that is able to compromise a set of functionaries before the attacker is able to make a withdrawal to their own wallet.”
SideSwap, whose key was used, is a federation member that performs peg-outs on behalf of Liquid users.
A Signal Number Appears
Two hours after the first message, a third transaction paid 69,093 satoshis to the same address with the text “Please contact us on Signal @m671aw.70.”
Samson Mow, chief executive of JAN3 and Blockstream’s former chief strategy officer, wrote in reply to a thread on the incident that “the request for Signal did not come from the same address.” Onchain data supports him: the message was sent to the address holding the funds, not from it.
Charles Guillemet, chief technology officer at Ledger, wrote earlier in that thread that the conduct does not match responsible disclosure. “White hats don’t drain a bridge and then solicit an ‘on-chain’ contact,” he wrote, comparing it to the Ronin bridge attack. After the Signal message appeared, he allowed for the other reading. “It doesn’t look like usual white hats practices, but usual criminal orgs don’t usually try to contact their victims either,” he wrote. “There’s hope. This could be people with good intentions that intensively played with recent LLMs and are not used to responsible disclosures.”
Bridge Blockstream Wanted To Replace
Blockstream chief executive Adam Back had not commented publicly as of publication, and the Liquid account has not posted since its statement.
Blockstream published a Liquid roadmap in May that included work on a “BitVM-style 1-of-n bridge” intended to cut the trust placed in the functionary set. That design is not live. Sunday’s withdrawal went out through the federated peg it was meant to replace.
Liquid launched in 2018 as a settlement layer for exchanges and traders and has since been built out as a smart-contract chain for bitcoin, most recently with Simplicity. It is the second bitcoin-adjacent network in two weeks to shut down rather than keep running through a security problem, after Core <a href="https://xpertsstudio.com/solana-blockchain-reshapes-the-crypto-world-with-lightning-speed/” title=”Solana Blockchain Reshapes the Crypto World with Lightning Speed”>Lightning maintainers told node operators to go offline on Aug. 26 without publishing a patch.
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Source: thedefiant.io