Invest1 publisher3 min readPublished
Liquid trades again with 598.5 BTC of its reserve still in the attacker's hands
Blockstream restored Liquid's blocks and transactions on Thursday but kept peg-outs switched off, so L-BTC holders hold a token whose reserve is short 598.5 BTC while Adam Back promises one-for-one redemption without a date.
The Investor · Invest desk
What happened
- Blockstream's Liquid sidechain resumed block production on Thursday, about four days after a person claiming white-hat status took roughly 4,000 BTC from its federation wallet.
- The attacker handed back 3,400 BTC and is keeping the remaining 598.5 BTC pending payment of a 10 per cent bug bounty.
- Peg operations remain switched off while the BTC-to-L-BTC reserve is rebuilt, though ordinary transactions resumed about ten hours after blocks restarted, at 19:55 UTC.
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Why it matters
- exposure An L-BTC holder who wants out while peg-outs are closed can only sell to another holder at whatever is bid, and the redemption right that anchors the token is unavailable at the same moment its backing is short.
- decision Honouring the peg one-for-one requires sourcing about 598.5 BTC, and the options are Blockstream's own balance sheet, a payment to the attacker, or a loss carried by token holders.
- cost On the wider reading of the demand, Blockstream would pay 400 BTC to retrieve 598.5, so the cheapest arithmetic route back to full backing is a transfer to the person who created the shortfall.
- contradiction Back tells holders the peg is good for the full amount while the attacker tells them to expect a 15 per cent loss, and only one of those survives the reopening of peg-outs.
L-BTC is a claim on coins held by the Liquid federation, and the peg-out is the mechanism that makes the claim good. That is the one function Blockstream has not switched back on [3]. Transactions restarted about ten hours after block production, at 19:55 UTC [3]. Adam Back wrote "Do not panic sell OTC" on X [16]. A holder who wants bitcoin this week has to find a buyer for the token instead.
The withheld coins are worth pricing against three different denominators. 598.5 BTC is 14.96 per cent of the roughly 4,000 taken [1], and 14.25 per cent of the federation wallet's 4,200-coin balance [2]. The hacker's warning that holders face "a 15% loss" [14] lands about there. What the report does not say is what the demanded 10 per cent is a percentage of. Ten per cent of the drain is 400 BTC, which is 198.5 BTC less than the attacker is holding [3]. Ten per cent of the 598.5 is 59.85.
At the $80,000 a coin implied by $320m on about 4,000 BTC [4], the larger reading of the demand comes to about $32m [5] against a shortfall Cryptopolitan puts at $46m to $47m [11]. Run it off the return instead and the September 7 conversion of 3,400 BTC into $269.2m implies about $79,200 a coin [7], which values the 598.5 at roughly $47.4m [8]. Either way, paying to recover the coins costs less than the coins.
The mechanism matters for who is liable. SideSwap's peg-out authorization key was used but never stolen [6], and Blockstream said the cause was a flaw in Elements that allowed invalid L-BTC to be created and redeemed through the normal path as if fully backed [7]. The reserve did not lose coins to a compromised signature. It paid out, correctly by its own rules, against tokens that had nothing behind them. Elements v23.3.4 hardened the cache keys used for range proofs a day before the restart [8], and bridge and functionary nodes are patched and signing [18].
Back has committed to redeeming L-BTC one-for-one [15] and has not said where the missing coins come from or when peg-ins and peg-outs reopen [17]. There are three ways that resolves. Blockstream funds the gap from its own balance sheet, at a one-time cost the reporting sizes at $46m to $47m [11]. Or it pays the bounty, recovers 598.5 BTC for 400 [3], and the person who wrote "Your dereliction of duty is obvious" [13] becomes a counterparty who has already performed once, having returned 3,400 BTC after Blockstream signed an on-chain note reading "Bridge nodes are patched, safe to return the funds" [9][10]. Or the hole stays in the reserve and redemption becomes first-come.
The attacker's own figure, unverified, is that Blockstream spent $1.5m protecting $5bn of assets [12], which is 0.03 per cent [6], and about a twenty-first of the bounty now demanded on the wider reading [9].
The thesis that holders carry this fails if peg-outs reopen at full size with no announced capital injection. That would mean $47m was small against Blockstream's balance sheet, which the reporting does not describe.
What to watch
- Whether peg-ins and peg-outs reopen at full size, and whether Blockstream names a source for the missing 598.5 BTC.
- Whether the attacker moves the 598.5 BTC, returns it, or restates the bounty demand with a stated base.
- Any OTC or secondary quote showing L-BTC trading below one bitcoin while redemption stays closed.