Liquid Network shut down after a security incident that wiped out about 4.000 Bitcoins worth about $320 million.
In a statement released Sunday, Liquid Network said that attackers posing as white-hat hackers withdrew approximately 4.000 BTC from the Liquid Federation wallet. The Blockstream team is now attempting to contact the hackers on-chain using a signed message.
Liquid says the funds were withdrawn via the SideSwap PAK or Peg-out Authorization Key. Interestingly, the company claims that the key itself was not compromised, nor were any other keys.
This leaves one question unanswered: If the keys weren't compromised, how did someone manage to withdraw around $320 million worth of Bitcoin?
Liquid and its federation members appear to be taking the situation seriously. Exchanges have been notified and have either paused or are expected to pause LBTC deposits and withdrawals.
Other assets on Liquid, such as USDT, DePix, and real money, are not affected by the hack, according to the company.
The biggest immediate problem is that Liquid has stopped working. Ridge nodes have been temporarily disabled, preventing new transactions from being submitted to the network.
“Essentially, Liquid’s sidechain has been put on pause until this issue is resolved,” Liquid Network said.
Liquid also warned that wallets will be affected while federation members work to restore normal network activity.
The attackers are described as white-hat hackers, which is an important distinction. To call this a $320 million heist would be premature. White-hat hackers typically discover or exploit vulnerabilities with the intent of reporting them rather than stealing money.
However, moving around 4.000 BTC from a federation wallet is a very harsh way to show that something is wrong.
The incident also draws attention to the architecture of Liquid. Liquid is a Bitcoin sidechain designed to provide faster and more confidential transactions. Unlike Bitcoin itself, Liquid relies on a federation to operate parts of the network, including the connection between BTC and LBTC.
For anyone who owns or uses LBTC, the most significant development right now is one: Liquid is being put on pause.
Liquid has asked users to monitor the relevant Bitcoin address via mempool.space while the investigation continues. The company has not yet provided a detailed technical explanation of how the “withdrawal” was made without compromising the Peg-out Authorization Key.
Although the press releases will range from very select to rare, I said I'd pass...because sometimes the editors hide.
