Liquid's "white hats" gave back 3,400 BTC. Blockstream is negotiating for the other 600

At 15:53 UTC on Saturday, September 6, at Liquid block 4,050,336, someone exploited a bug in how Liquid nodes cache range-proof verifications to create roughly 4,000 L-BTC that were not backed by bitcoin in reserve. They sent the tokens to SideSwap, a Liquid Federation member holding a peg-out authorization key, which processed them like any other withdrawal. Twenty-three minutes later, by SideSwap's account, the federation paid 3,996 BTC to the customer's address. Liquid's reserve fell from about 4,205 BTC to 197.

By Monday 3,400 BTC had come back. About 598.5 BTC, roughly $47 million at this week's prices, has not. "Discussions between Blockstream and the individuals responsible are ongoing to secure the return of the remaining funds," Liquid said on Tuesday. On Wednesday Blockstream shipped Elements v23.3.4, reviewed by the Bitcoin Red Team, Alpen Labs and others, hardening the cache keys used for range proofs.

Liquid Network 🌊@Liquid_BTC

LIQUID NETWORK UPDATE: NEW RELEASE
Status as of September 9, 2026, 13:30 UTC

Update to Elements v23.3.4

The emergency Elements v23.3.4 release is now available. Functionary nodes are being updated immediately and we recommend all Liquid node runners do the same. This release addresses the proof-verification cache vulnerability, hardening the cache keys used for range proofs.

Elements v23.3.4 has undergone multiple rounds of internal and external review, including by the Bitcoin Red Team, Alpen Labs and others. Blockstream sincerely thanks these teams for their valuable review and collaboration.

Liquid Network Recovery Plan

The recovery plan remains under active development and may be revised as testing and validation continue. Based on current assessments, the anticipated stages are:

1) Resume block production while peg operations remain suspended.

2) Replay transactions verified as valid.

3) Resume peg operations once the network state has been fully restored including a return of funds.

Blockstream is testing the procedures for the first two stages in parallel. While the current plan anticipates proceeding in the order above, the sequencing and implementation may be adjusted based on the results. No stage will proceed until it is considered safe to advance.

Beware of Scams

There are reports of scammers attempting to exploit this situation by misleading users with fake update sites. This is a reminder to only rely on official Liquid Network and Blockstream channels, and never send funds or disclose private keys or seed phrases in response to unsolicited messages.

We again thank the broader Bitcoin community and our research collaborators for their continued support and assistance. Safely restoring normal operations remains the highest priority for the Liquid Federation and Blockstream.

t.co/AqhLfbqYh4

The sidechain is still paused. The recovery plan is to resume block production with pegs suspended, replay valid transactions, then resume pegs "once the network state has been fully restored including a return of funds."

What broke, and what did not

Liquid's incident report is careful about the second part, and rightly. "No keys were compromised. The Liquid Federation functionaries were not hacked ... The peg-out mechanism that authorizes withdrawals to whitelisted addresses operated as designed." The 11-of-15 functionary multisig did exactly what it was built to do. It was handed tokens every node considered valid, "because the validation failure occurred at the transaction level before the peg-out was initiated."

That is the unusual part. Nothing was stolen in the sense of a key being taken; Tom's Hardware contrasted it with January's Step Finance loss, where attackers compromised executives' devices. Here the chain believed a lie about its own supply. USDT and other Liquid-issued assets were unaffected.

The exploiters called themselves white hats in an on-chain message: "Please fix the bug first. The chain is under risk at latest commit right now. Make sure every node is patched. Then we will transfer the money back safely after confirming the fix." Ledger CTO Charles Guillemet stopped accepting that reading once 600 BTC stayed out: "If this was ever a negotiated reward under an encrypted contract signed on-chain, it looks more like extortion than white-hat hacking!" Blockstream, on Wednesday, told users to treat "unsolicited 'white-hat' or bounty outreach" as scams.

Our read

What do you call a 15 percent retention on $320 million? A bounty set by the taker, and the phrase "white hat" does not survive it. We'd expect Blockstream to pay, in the sense of accepting the 3,400 as the recovery and calling the 600 a reward, because the alternative (restoring a network with a 600 BTC hole in a federation whose members are exchanges and brokers) is worse for everyone at the table. That is not a criticism. It is the market price of a bug that let someone print bitcoin.

The structural point outlasts the negotiation. Liquid's security model is that a federation of more than 80 firms and 15 functionaries cannot be individually corrupted. Saturday showed that model has nothing to say about a consensus bug: every honest node validated the fake. A federated sidechain's peg is only as sound as the least-reviewed line of its verification code, and Elements has far fewer eyes on it than Bitcoin Core.

That is awkward for the pitch that Liquid is where bitcoin treasury companies and tokenised securities should settle. Five such products listed on Bitfinex Securities via Liquid in the first week of September, and their issuers now have a nine-day pause to explain. We'd expect pegs to resume before September 30 with the 600 BTC unreturned and the reserve made whole by Blockstream or federation members, and the first post-mortem to name a second reviewer finding in the same cache path. If all 4,000 come back before the pegs reopen, the white hats were what they said they were and we owe them the label.