Liquid Network Slowly Reboots After $320M Bitcoin Bridge Exploit

The Liquid Network, a Bitcoin sidechain used for issuing L-BTC tokens backed by locked Bitcoin, has resumed generating blocks after a major security incident drained nearly 3,996 BTC (roughly $320 million) from its federation wallet, leaving reserves at only about 202 BTC. The attackers exploited a flaw in the network's proof-verification protocol to issue L-BTC tokens without depositing any real Bitcoin as backing, then redeemed those tokens through SideSwap's authorised peg-out process to withdraw genuine Bitcoin from the federation's reserves.

Liquid has described the actors as white-hat hackers who lacked authority to issue tokens, though the incident still resulted in a significant loss of backing reserves. In response, the network released an emergency software update (Elements v23.3.4) and is urging all node operators to install it immediately. While block production has resumed as a cautious first step, all transactions, transfers and peg-out withdrawals remain disabled until reserves backing L-BTC are restored.

This incident highlights how vulnerabilities in cross-chain bridge and token-issuance systems can be exploited to create value from nothing, even when the underlying blockchain itself remains secure.