Liquid restarts; Blockstream refuses 598 BTC ransom

The Liquid Network is moving again. Block production resumed on 10 September at 10:00 UTC and transactions followed at 19:55 UTC the same day. Peg-outs remain disabled. And on 11 September, Blockstream told the exploiter who still holds 598.5 BTC that there will be no payment: “Return the bitcoin.”

That closes the ambiguity that hung over this incident for five days. The people who drained roughly 4,000 BTC from Liquid’s federation wallet on 6 September called themselves white hats, returned most of it, and asked to be paid for the rest. Blockstream’s answer is that this was a crime, not a disclosure.

What actually broke

Liquid is a Bitcoin sidechain. Users peg bitcoin into a federation-controlled wallet and receive L-BTC, a 1:1 token with confidential transactions and faster finality than mainchain Bitcoin. Peg-outs burn L-BTC and release the underlying coins. The federation, not miners, runs that bridge.

Liquid’s incident report, published 8 September at 19:10 UTC, names the fault precisely. On 6 September at 15:53:10 UTC (Liquid block 4,050,336), a vulnerability in how Liquid nodes cache range-proof verifications was exploited to create about 4,000 L-BTC that were not backed by bitcoin in reserve.

The exploiter then used SideSwap, a federation member holding a peg-out authorization key, to convert that unbacked L-BTC to real bitcoin through the ordinary peg-out path. Because the validation failure happened at the transaction level before the peg-out began, both SideSwap’s node and the federation’s globally distributed functionary nodes accepted the L-BTC as valid. The functionaries released roughly 3,996 BTC to SideSwap’s whitelisted address, which forwarded it on as instructed.

The reserve held about 4,205 BTC before the incident. After that peg-out and others processed before operations halted, it fell to 197 BTC.

Two clarifications the report makes explicitly: no keys were compromised — the peg-out mechanism worked exactly as designed on input it should never have accepted — and USDT, DePix and other Liquid-issued assets were never the target, though they were frozen along with everything else while the chain was down.

The bounty demand, and the refusal

The actors identified themselves as white-hat researchers in a message written to the Bitcoin mainchain, and asked Blockstream to patch every node before they would return “most” of the coins. After the bridge-node patch completed on 7 September at 01:09 UTC, on-chain records show exactly 3,400 BTC going back to the federation peg wallet at 16:09:25 UTC. That left 598.5 BTC — about 15% of the total, near $47 million at the time — outstanding.

Then the framing changed. The exploiter demanded 10% of recovered funds as a bug bounty in an on-chain message, arguing Blockstream had spent “$1.5 million, maybe even 0,” to secure billions in assets, and warning: “You SHALL pay 10% using your own money as bug bounty or you will cause all your holders a 15% loss.”

Blockstream refused on 11 September: “Taking assets without authorization and withholding their return is a crime, not responsible disclosure.” And: “We will not pay for the return of stolen property. We will not abandon our users.”

Ledger CTO Charles Guillemet had called the leftover, if it were a negotiated reward, “more like extortion than white-hat hacking.” Blockstream has now landed in the same place in its own words.

Back online, but not all the way

Recovery came in stages, and the distinction between them matters if you hold anything on Liquid.

Liquid says peg-outs stay off “as a precautionary measure while the final stage of recovery continues,” with rigorous testing, code scanning and network monitoring underway by internal and external teams. Further information will come “once available.” Node operators should update to v23.3.4 immediately; ordinary users need take no action.

So L-BTC, USDT and DePix can move on Liquid again. Getting bitcoin off Liquid to the mainchain cannot happen yet. And the reserve that backs L-BTC is still short the 598.5 BTC the exploiter kept — a gap Blockstream has said it will not close by paying for it.

Brazil’s DePix rail is taking Pix again

DePix is a Brazilian real-pegged token that lives on Liquid and is bought with Pix. While the sidechain was down, depix.st — a purchase front that issues via Eulen — put new buys in maintenance, citing a Liquid fault that “compromises transaction confirmation,” and stopped generating Pix charges. With transactions live again, that maintenance notice is gone and the buy flow is back up.

That was always the regional shape of this incident. Liquid’s statement that DePix was “unaffected” meant the token was not the drained asset. It never meant a Pix-to-DePix desk could settle while the chain could not accept transactions. The rail was hostage to the bridge, not to its own solvency.

Wallets that treat Liquid as everyday bitcoin felt the same freeze and the same thaw. AQUA, the JAN3 wallet, said throughout that app keys were uncompromised and native on-chain Bitcoin kept working. BULL, which we profiled last month, parks small spends in a Liquid Instant Payments wallet used on its Mexico, Argentina, Colombia and Costa Rica rails. SideSwap told users their non-custodial balances were always theirs; its swaps and peg operations track the federation’s own schedule.

What to take from it

Watch for scams before anything else. Blockstream has published a phishing alert naming the pattern: fake “mandatory security update” portals, refund and “claim L-BTC” sites, lookalike domains, and unsolicited bounty outreach. Blockstream will never ask for a recovery phrase or PIN, ask you to send funds, or link you to software. Ignore anything offering to “unstick” a peg-in.

If you hold L-BTC, DePix or Liquid USDT in a wallet whose keys you control, those keys were never the failure. The failure was software that minted L-BTC the federation then honoured as real, and a pause that stopped every asset on the chain from moving while it was sorted out.

Mainchain Bitcoin did not fork, pause, or lose a federation wallet. Coins that never left L1 are where they were on 5 September. The convenience of Liquid — confidential amounts, fast spends, Pix-settled reais — is a federated trust model, and this week priced it: one caching bug in the verification path took the whole chain offline for four days, froze a Brazilian on-ramp that had nothing to do with the bug, and left the reserve 598.5 BTC short with no legal way to compel its return. This is a report on a restarted network and an unresolved shortfall, not advice to buy, sell, or peg coins into any sidechain.