Liquid Network Bitcoin Sidechain Hit by $320M Exploit, 85% Recovered

Bitcoin's Liquid Network, a layer-2 sidechain used for privacy and asset transfers, suffered a major security breach over the weekend when attackers exploited a software vulnerability that allowed them to create unbacked L-BTC tokens and redeem them for real Bitcoin. The exploit drained roughly 4,000 BTC (about $320 million), representing 95% of the network's reserves.

The attackers, who described themselves as "whitehats," flagged the vulnerability publicly and demanded that Blockstream, the network's developer, deploy a patch before they would return the stolen funds. After the fix was applied, the group returned 85% of the drained amount (roughly 3,400 BTC) to the network's multisig wallet, but is still holding about 598.5 BTC with no update on its fate.

In response, Blockstream and federation members disabled bridge nodes, freezing the peg-out system, while exchanges including Bitfinex and wallets like Aqua suspended L-BTC deposits and withdrawals. Tokenized assets such as Liquid-based USDT were reportedly unaffected. However, the unresolved shortfall raises the risk that L-BTC could trade at a discount to Bitcoin, potentially triggering capital flight if the deficit is not covered.