A Bitcoin-based payment and settlement sidechain called Liquid Network confirmed on Sunday that approximately $320 million in Bitcoin was unexpectedly withdrawn from its reserve wallet during a major security breach.
According to Reuters, the network stated in a post on X that self-described group named “white-hat hackers” removed roughly 4,000 of the 4,200 Bitcoins held in its Liquid Federation wallet, which is about 95% of the sidechain’s total backing reserves.
“Liquid wallets will be impacted, and we’re sorry for any inconvenience,” Liquid Network posted on social media, confirming that operators halted all new transactions across the network while investigating the incident.
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According to the network’s statements, the assets were withdrawn through SideSwap, a settlement platform authorized to handle redemptions from the network.
Liquid Network clarified that while SideSwap’s withdrawal mechanism was utilized, the authorization keys backing the process were not compromised.
Industry cybersecurity analysts and developers indicated the exploit stemmed from a vulnerability in Elements, the open-source software powering the sidechain, which allowed for the improper generation of tokens without proper key theft.
Created in 2018 by blockchain technology firm Blockstream, Liquid Network functions as a secondary network or sidechain, designed to enable cryptocurrency exchanges, asset managers, and high-volume traders to execute faster and private settlements outside the main Bitcoin blockchain.
The platform operates by locking up Bitcoin on the primary chain and issuing a pegged digital asset called Liquid Bitcoin (L-BTC).
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Following the breach, the individuals behind the withdrawal communicated with Blockstream developers via public, PGP-encrypted messages embedded in the Bitcoin blockchain, asserting they took the funds to demonstrate a critical code flaw.
Blockchain data later showed that 3,400 of the 4,000 withdrawn Bitcoins were returned to the federation wallet after Blockstream deployed a software patch to its bridge nodes on Monday, while roughly 598.5 Bitcoins remained unreturned.
Federation members instructed partner exchanges to suspend deposits and withdrawals of L-BTC while the sidechain infrastructure is updated and prepared for a coordinated restart.
Other tokens issued on the network, including stablecoins and tokenized real-world assets, were not directly affected by the core Bitcoin reserve drain.