A yet-to-be-identified actor has returned most of the nearly 4,000 BTC drained from Liquid’s federation reserve, sending 3,400 BTC back to the federation while retaining almost 598.5 BTC.
The transaction, sent Monday, September 7, transferred 3,400 BTC, worth about $268 million at the time, to Liquid’s federation wallet. Another 598.49955894 BTC, worth roughly $47 million, was sent to an address controlled by the actor.
The return came after the actor, who claimed to be a white-hat hacker, demanded that the vulnerability be fixed and exchanged a series of signed messages with Blockstream, the developer of the Liquid sidechain, through Bitcoin transactions. The incident forced Liquid to halt network activity on September 6.
“Following the recent incident affecting the Liquid Network and the movement of funds, Blockstream, as Liquid’s technical provider, and the Liquid Federation have been working diligently to resolve the ongoing situation and ensure the return of assets,” the company stated in a post on X.
According to Blockstream, “updated software has been deployed as the Federation members prepare the network for a coordinated restart.”
The firm has not confirmed that the actor is a legitimate security researcher or that the retained Bitcoin represents a bounty.
Following the recent incident affecting the Liquid Network and the movement of funds, Blockstream, as Liquid’s technical provider, and the Liquid Federation have been working diligently to resolve the ongoing situation and ensure the return of assets.
Updated software has been…
— Blockstream (@Blockstream) September 8, 2026
What is Liquid?
Launched in 2018, Liquid is a Bitcoin sidechain developed by Blockstream for faster settlement, confidential transactions and the issuance of digital assets.
Liquid is operated by a federation of companies that collectively manage the network and custody the Bitcoin backing its native L-BTC token. The federation includes more than 80 exchanges, infrastructure providers and other financial companies.
Users can send BTC from Bitcoin to Liquid through a two-way peg and receive L-BTC, which is designed to represent one bitcoin held in Liquid’s federation reserve. L-BTC can then be transferred within the sidechain. When users want to return to Bitcoin, they initiate a peg-out: the L-BTC is destroyed and the federation releases the corresponding BTC from its reserve.
That reserve held about 4,200 BTC before Sunday’s incident.
The attacker claims to be a white hat
On September 6, approximately 4,000 BTC, worth around $320 million, left Liquid’s federation wallet through SideSwap’s peg-out service. The withdrawal represented roughly 95% of the Bitcoin held in reserve.
After the withdrawal, the party controlling the funds posted an OP_RETURN message:
“we are whitehats. contact us on chain.”
Blockstream responded through Bitcoin transactions, and the two sides began communicating through PGP-signed messages embedded in transactions, with the actor demanding that the vulnerability be fixed before the funds were returned.
The actor later wrote:
“Please fix the bug first. The chain is under risk at latest commit right now.”
Blockstream subsequently indicated that the affected bridge nodes had been patched and that the funds could be returned.
The actor then sent 3,400 BTC back to the federation.
The remaining 598.5 BTC has not been explained publicly. There is no disclosed agreement between the actor and Blockstream or Liquid establishing the amount as a bounty, and Liquid has continued to describe those involved as “purported white-hat hackers,” a term used to describe ethical hackers who exploit flaws in protected systems before malicious actors can exploit them.
A bug in Elements allowed L-BTC to be created
Liquid is built on Elements, Blockstream’s open-source blockchain software. Elements provides the transaction and asset functionality used by Liquid, including confidential transactions that hide transaction amounts while allowing nodes to verify their validity.
Liquid said neither the Peg-out Authorization Key used by SideSwap nor any other federation key had been compromised.
“What we know so far is that the funds were withdrawn via the SideSwap PAK (Peg-out Authorization Key), but that key was not compromised, nor were any others,” Liquid stated shortly after the incident. “Exchanges have been notified and have already paused (or will pause) LBTC deposits and withdrawals. Other Liquid assets such as USDT, DePix, and RWAs are unaffected by this security incident.”
We are aware of a security incident on @Liquid_BTC. Purported white-hat hackers have withdrawn ~4,000 BTC (~$320 million) from the Liquid Federation wallet. The @Blockstream team is working on contacting them on-chain with a signed message.
What we know so far is that the funds…
— Liquid Network 🌊 (@Liquid_BTC) September 6, 2026
SideSwap also said its systems were not breached and pointed to a bug in Elements, the software underlying Liquid. According to SideSwap, it had no way to determine that the L-BTC was not legitimately backed by Bitcoin.
Blockstream has not publicly disclosed the technical details of the vulnerability. Decrypt reported that a fix had been added to the underlying software about five weeks before the incident. The flaw apparently allowed the creation of L-BTC.
The vulnerability involved the validation of confidential transactions. Elements uses cryptographic range proofs to verify that hidden transaction amounts satisfy the network’s rules. Because verifying those proofs can be computationally expensive, the software caches validation results.
Independent analysis of the Elements code indicates that the affected cache did not include enough transaction context to prevent a previously validated proof from being reused in a different context. That could allow a transaction that should have failed validation to be accepted by some nodes.
The attacker could then use the resulting L-BTC in a normal peg-out.
This meant the federation was not required to approve an obviously fraudulent transaction. The peg-out mechanism saw L-BTC that appeared valid, while the underlying sidechain accounting had already been compromised.
Liquid and Blockstream have not yet published a complete technical post-mortem explaining the exploit or its discovery.
The incident’s implications
The Liquid incident has also raised questions about the timing of the software fix.
A change addressing the relevant Elements vulnerability had been merged into the project’s public repository before the exploit, but the fix had not yet been included in a tagged release deployed across Liquid.
The public nature of the Elements development process means the attacker may have been able to identify the vulnerability from the code changes, although there is currently no evidence establishing how the flaw was discovered.
For the broader Bitcoin infrastructure sector, the incident lands amid a year already marked by a $116 million Coldcard firmware exploit, even as the base protocol remains unaffected. It also revives a recurring debate about federated sidechains: while offering functionality Bitcoin’s base layer does not—confidential transactions, faster settlement, asset issuance—they reintroduce the kind of trusted intermediation and software-attack surface that Bitcoin’s own design was built to minimize. That trade-off is structural, and this incident will likely renew scrutiny of it regardless of how the remaining 598.5 BTC is resolved.