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Liquid sidechain pauses after nearly 4,000 BTC withdrawn from federation wallet

Blockstream said the withdrawal used a peg-out authorization key that was not compromised, leaving the route into the peg unexplained.

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Blockstream paused its Liquid sidechain after nearly the entire bitcoin reserve backing L-BTC was withdrawn from the Liquid federation wallet on Sunday, with the recipient identifying themselves on-chain as “white hats,” The Defiant reported.

Liquid said the funds left through a working SideSwap peg-out authorization key rather than a stolen one, but it has not explained how the peg was accessed. The federation wallet now holds 197.47 BTC after two transactions, a 2.5 BTC transfer and a follow-on withdrawal of 3,995.99999857 BTC that later consolidated into a single output and included an OP_RETURN message.

Liquid disabled bridge nodes so no new peg-related transactions can be submitted, told exchanges to pause L-BTC deposits and withdrawals, and said assets issued on Liquid including USDT and DePix were unaffected. Bitcoin was also up 0.1% on the day at the time of the incident report, according to the article.

The network added that the peg wallet is an 11-of-15 multisig and that peg-outs are constrained by the PAK list used for authorization. It also noted that updating the PAK list takes three days, which is intended to help detect an attacker before they can withdraw to a self-controlled wallet, while SideSwap performs peg-outs as a federation member.

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