Liquid Network halted activity on Sunday after purported white hat hackers withdrew roughly 4,000 Bitcoin from its federation wallet. The funds were worth about $320 million at the time. Liquid disclosed the Sept. 6 incident in a post on X.
The withdrawal accounted for about 95% of the network’s reported Bitcoin reserves. Before the incident, the federation wallet held roughly 4,200 BTC. Liquid had not confirmed a return of the funds in its announcement.
What Is Known About the White Hat Hackers?
A Bitcoin transaction linked to the incident carried an on-chain message. It read: “We are whitehats. Contact us on chain.”
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Blockstream attempted to contact the alleged white hat hackers via a signed message on the Bitcoin blockchain. Blockstream develops Liquid’s infrastructure. Neither the parties nor the specifics of communication have been revealed.
Liquid claims that the withdrawal went through the Peg-out Authorization Key, which is commonly known as PAK. It was stated that the PAK key, as well as any other keys, was not compromised.
PAK restricts the ability to peg out funds only for registered accounts and approved Bitcoin addresses. The restriction concerns places where the federation is able to send BTC during a withdrawal.
No information has been provided about the vulnerability that was exploited by the alleged white hat hackers.
Why Did Liquid Suspend Network Activity?
What concerns the attack of white hat hackers is that Liquid turned off the bridge nodes. In this case, Liquid did not enable users to send transactions to the blockchain network anymore.
Bridge nodes connect users’ nodes with the specific functionary servers of the federation.
The crypto exchanges were notified about the security breach. It was stated that the exchanges had stopped accepting and withdrawing LBTC or would do it soon.
According to Liquid, the USDT, DePix, and fiat currency that were created in the sidechain were not influenced by the security breach. However, it is said that there will be disruption in the wallets.
The federation members made an attempt to solve the issue and continue working. The statement says that the sidechain will be turned off until the issue is resolved.
How Does Liquid Secure Its Bitcoin Reserves?
Bitcoin by the group of white hat hackers was one of the reserves for the Liquid network. In routine operation, users deposit the BTC into the federation wallet in exchange for LBTC in equal amounts.
Such an action is termed as a peg-in. The opposite procedure is peg-out, in which a member of the federation must destroy the LBTC prior to releasing the Bitcoin. Users operating the Liquid node can even verify the LBTC supply against the Bitcoin owned by the federation.
According to Blockstream’s documentation, 15 federation members have access to the keys of the reserve wallet. The hardware security modules keep the keys safe. In order for Bitcoin to leave the wallet, 11 members should sign a standard peg-out transaction.
Liquid uses Elements, which is an open-source software that relies on the Bitcoin protocol. Unlike Bitcoin, it uses the signatures of the federation members instead of Bitcoin miners for block confirmation. One-minute blocks are created in normal conditions. (docs.liquid.net)
Liquid also allows using tokens that represent different kinds of assets, like fiat currency and securities. Confidential transactions hide the transfer amount and asset type from the third-party observer. LBTC is used as a means to pay for transaction fees.
The project was founded in 2018 with the purpose of accelerating the exchange process between exchanges, brokers, and other users. The first block of Liquid was mined on Sept. 27, and the official announcement about it took place on Oct. 10.
The number of participants of Liquid at the time of its launch was 23. They included Bitfinex, OKCoin, BitMEX, and SIX Digital Exchange. Initially, the transaction settlement time was two minutes.
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