Liquid Network Restarts Block Production After $320M Bitcoin Exploit

• Liquid Network restarted block production after patching its nodes, but it continues to halt transactions and Bitcoin peg operations.
• Hackers returned 3,400 BTC, but they still hold 598.5 BTC outside the federation wallet.

The Liquid Network has resumed block generation after the large Bitcoin withdrawal from its system. But users can’t perform transactions or cash out L-BTC at this time. This is because the resumption of block generation represents a cautious attempt to return to normalcy. Especially, after a hack attack that saw nearly $320 million of Bitcoin withdrawn from Liquid’s federation wallet. According to the Liquid network, functionaries now generate and validate blocks using the latest software upgrade on the functionary and bridge systems.

Liquid Restarts Blocks But Leaves Transfers Frozen

The partial liquidation process means that there is a separation between block generation and the entire transaction processing in the Liquid system. Hence, users can generate blocks, but they cannot perform normal transfers or use Bitcoin bridge services. Moreover, Liquid will also keep peg operations disabled. For example, even peg-out withdrawals authorized by Peg-out Authorization Keys will not be available until Liquid restores reserves that back the issued L-BTC. Normally, Liquid allows users to lock Bitcoin and receive equivalent L-BTC and then use them to withdraw Bitcoin from the bridge services controlled by federations.

That mechanism failed because attackers found a vulnerability in the proof-verification protocol and issued unbacked L-BTC. Without providing any Bitcoin as backing in the federation’s reserves. Then the attackers transferred the tokens through SideSwap’s authorized peg-out process. The redemption process then released Bitcoin from the federation wallet. The withdrawal removed approximately 3,996 BTC from the wallet, reducing the federation’s reserves from about 4,205 BTC to 202 BTC. Liquid identified the actors behind the attacks as white-hat hackers but they did not have any authority to issue tokens.

Patches Aim to Fix Proof Verification Vulnerability

Liquid upgraded its software to Elements v23.3.4 prior to reactivation of blocks and modification of cache keys used to validate proofs of transactions. The patch aims to prevent attackers from reusing proofs for invalid transactions. Functionaries and bridges were patched before block creation was resumed; transfers continued to be off-limits.

The federation of Liquid utilizes 15 functionaries who change regularly and need 11 signatures to make Bitcoin transactions. After confirming the patches by Blockstream, the attackers transferred 3,400 BTC back to the wallet of the Liquid federation. This move covered around 85% of the money that was withdrawn, and the other 598.5 BTC is still beyond the reach of Liquid.

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