A dispute regarding the Blockstream ransom demand has been intensified since there are still 598.5 BTC held by the attackers following the Liquid Network hack. Blockstream has decided not to pay. So far, 3,400 BTC has been restored.
What Happened in the Liquid Network Exploit?
In a post on X dated Sept. 11, Blockstream said that it would not compensate for the return of any other Bitcoins. Blockstream refuted the claims by the actors that their actions constituted responsible disclosure and also denied that it was a case of white-hat activity.
“We will not pay a ransom for the return of stolen funds. Taking assets without authorization and withholding their return is a crime, not responsible disclosure. It is not white-hat activity. It is theft,” said Blockstream.
The dispute began after nearly 4,000 BTC left Liquid’s federation wallet on Sept. 6. Blockstream then opened communication with the unidentified actors to recover funds belonging to users and protect the wider Bitcoin community. The company said those discussions never meant it accepted the withdrawal or later payment terms.
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Approximately 3,400 BTC was transferred back to the federation wallet on Sept. 7. This transaction allowed the retrieval of about 85% of the withdrawn Bitcoin in total. About 598.5 BTC, valued at $47 million during the time of the bigger payout, still remained under the control of the attackers.
The Blockstream ransom demand later became the center of the debate. The attackers required Blockstream to cover a 10% bounty with their own funds. These messages implied that Liquid holders could continue to be vulnerable to potential losses if it was not done.
Blockstream refused to accept these terms and claimed that open-source developers must not have to pay ransom with their own funds after any unauthorized withdrawals.
The firm suggested that such a structure would provide developers with improper motivation when their economic involvement is minimal in the project. Also, the users of Bitcoin should not suffer losses while fulfilling the demand for ransom.
Why Is the Blockstream Ransom Demand Being Rejected?
The individuals involved had referred to themselves as whitehats in messages that were included in the Bitcoin transactions.
Prior to repaying most of the money, they demanded that Blockstream patch the vulnerability in all the nodes concerned. Blockstream confirmed in a signed message that it had patched the bridge nodes.
The repayment came after this confirmation, but the individuals did not repay the entire amount. No agreement was made in public that had allowed them to hold on to the remaining coins as a reward, according to Blockstream. The outstanding amount remained at an address under their control.
Thus, the Blockstream ransom demand clearly divided the initial technical discussion from the subsequent financial dispute.
Blockstream maintained that their discussions were conducted solely for the recovery of user funds and that such discussions did not provide the authority or obligation to pay the actors.
How Did the Exploit Affect Liquid?
According to Blockstream, their investigation identified the cause as a cache-key collision in the confidential transaction verification process.
Blockstream reported that the federation keys were not compromised in the attack, but rather the vulnerability helped Bitcoin escape from the reserves through the affected verification process.
Liquid shut down the production of blocks while the problem was addressed and corrected. The exchanges were requested to stop accepting and making payments with L-BTC until the problem was addressed. Blockstream released an update, Elements v23.3.4, to fix the problem and allow the network to operate.
Blockstream is operating normally and processing transactions for its users once again. Nevertheless, 598.5 BTC is still missing and thus is no longer in the reserves under the federation’s control. Samson Mow, former executive at Blockstream, explained that currently L-BTC is 85% backed.
Blockstream ransom demand is relevant because the lost Bitcoins have implications on the backings. Blockstream has not reached an agreement to compensate for the shortfall by paying the actors. Instead, the company continues to look for the retrieval of the lost funds.
What Happens Next for Blockstream and Liquid?
According to Blockstream, the ability to track the movements of those connected with the exploit is possible due to the public ledger of Bitcoin. The transactions related to the withdrawn funds can be seen on-chain. Such transactions might help with legal, exchange, and forensic recovery if the actors move the coins.
However, Blockstream still left the opportunity for the voluntary transfer of the other coins in addition to the Blockstream ransom demand. In case of such a transaction, the missing reserve balance will be replenished without ransom. The dispute about 598.5 BTC will be settled as well.
Thus, the Blockstream ransom demand became the test for recovery of the funds without rewarding the actors for their illegal activities. Blockstream confirmed that it will continue lawful recovery of the funds.
The critical question for the Liquid users is whether the final coins will be reverted to the control of the federation. The reserve is not fully covered until that point. The Blockstream ransom demand will remain unresolved unless the involved parties give back their Bitcoin.
Also Read: Liquid Network Resumes Block Production After $320M Bitcoin Withdrawal
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