Over the weekend, Bitcoin’s layer-2 privacy side chain, the Liquid Network, suffered a 4,000 BTC (roughly $320 million) exploit, which was 95% of its total reserves.
In the last few hours, the hackers, who explicitly stated “we are whitehats,” partially lived up to their self-given name. They safely returned 85% (about 3,400 BTC or roughly $269.2 million) of the drained amount.
Nonetheless, a major depegging threat remains, seeing as the network heavily relies on the 1:1 backing of Bitcoin to L-BTC.
Notably, the hackers extracted the stolen funds while flagging the software vulnerability that allowed them to print unbacked L-BTC tokens and redeem them for real Bitcoin. They then demanded the network’s developer, Blockstream, deploy a patch and update to fix the issue as a prerequisite to fund restoration.
Once this was done, the hackers rerouted 3,400 BTC back to the Federation’s multisig wallet. The group is now still holding onto the remaining 598.5 BTC. So far, there is no communication from them or Blockstream regarding the fate of the remaining coins.
Source: Mempool
Following the security breach, Blockstream and the federation members disabled bridge nodes, effectively freezing the whole peg-out system.
Major exchanges like Bitfinex and platforms like Aqua wallet followed suit, suspending all L-BTC deposits and withdrawals to contain the matter.
Notably, tokenized assets like Liquid-based Tether (USDT) and real-world assets (RWAs) were unaffected by the security incident.
However, the deficit means L-BTC could potentially trade at a discount to Bitcoin if the 600BTC deficit remains uncovered. This could trigger a capital flight, further cutting down the value of L-BTC.
Blockstream co-founder and CEO Adam Back is yet to comment on the matter. Liquid Network’s last communication remains that the federation members are working to resolve the issue.
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