What happened

At 14:05 UTC on Sunday, someone sent 4,000 L-BTC to SideSwap, a federation member that processes peg-outs. SideSwap handled it like any other order. The L-BTC was burned with valid authorisation and at 14:28 UTC the federation paid out 3,996 BTC, roughly $320 million, to a Bitcoin address it had never seen. Eleven of the fifteen federation keys signed the transaction because, under the rules, it looked valid.

The wallet held about 4,200 BTC before. It now holds under 200.

Not a key theft

Blockstream says no private key was compromised, and SideSwap says its systems were not breached. Early analysis points to a range-proof verification cache bug in Elements, the Bitcoin Core fork that powers Liquid, which allowed the creation of L-BTC that was never backed. The attacker then used Liquid's normal peg-out process to turn it into real Bitcoin.

"We are whitehats"

The recipient wrote that phrase into a Bitcoin block via OP_RETURN. Blockstream replied the same way, signed with its PGP key, and the two sides have exchanged multiple on-chain messages. The attackers say they will return most of the funds once every node is patched. Ledger's CTO and others have rejected the white-hat framing.

The fallout

Liquid is paused, bridge nodes are disabled and exchanges have suspended L-BTC deposits and withdrawals. Holders of L-BTC cannot currently convert back. Bitcoin's base layer is unaffected; if you hold BTC directly, you are not exposed.

Why this matters

Liquid launched in 2018 to give exchanges faster settlement than Bitcoin's base chain. A drain of almost the entire reserve challenges the federated sidechain model itself and puts pressure on every project that relies on range-proof logic they assumed was solid.