Liquid Network halted operations Sunday after suspected white-hat hackers drained approximately 4,000 BTC valued at $320 million from its federation wallet, representing nearly all reserves backing L-BTC tokens. The withdrawal occurred through SideSwap’s Peg-out Authorisation Key, though Liquid maintains the key itself was not compromised. Preliminary reports suggest a software vulnerability enabled attackers to create unbacked L-BTC tokens and redeem them for actual Bitcoin from reserves.
Federation members shut down bridge nodes to prevent further transactions, effectively freezing the sidechain while Blockstream attempts on-chain contact with the alleged white-hats. Multiple exchanges have suspended or are preparing to suspend L-BTC deposits and withdrawals. The incident exposes critical vulnerabilities in Liquid’s centralized federation model, which controls the peg mechanism between L-BTC and Bitcoin reserves. While Liquid claims other tokenized assets on the network remain unaffected, the reserve depletion raises immediate questions about L-BTC’s viability.
FXnCO Insight
Traders holding L-BTC exposure should exit positions immediately or prepare for potential permanent peg breaks until Liquid provides verified proof of reserve restoration and independent security audit.
Source: Finance Magnates