‘Safe to Return the Funds’

In the most recent development, attackers, who present themselves as a “white hacker,” said they’ll return “the money back safely” once a bug that allowed this theft is fixed. To which the Blockstream team said, “Yes, thank you,” later adding that “Bridge nodes are patched, safe to return the funds.” However, in an earlier message, the attacker said they’ll return “most” of the money. Meanwhile, an unsigned message appeared onchain offering a 98 bitcoin bounty, possibly coming from an impersonator. There have been no official statements from Blockstream on the matter.

In either case, the whole network’s ecosystem is on pause while its participants face uncertainty over when they’ll be able to use their assets on the network and what those assets will be worth.

Bridge nodes have been disabled, and exchanges have been asked to pause L-BTC deposits and withdrawals.

The L-BTC Question

The key question concerns L-BTC, the network’s native currency. The coin is supposed to be backed 1:1 by bitcoin, but the hackers drained roughly 4,000 BTC from Liquid Network’s federation wallet on Sunday, meaning L-BTC is now backed by only 4.7% of the required assets, as only 197 BTC is left in the federation’s wallet. Therefore, while Liquid Network users can’t move their funds on the network, it’s still unknown what will happen to the value of L-BTC, which remains in users’ wallets, when the network reopens.

However, Mempool.space developer Mononaut argues that a sidechain token like L-BTC remains a distinct asset with its original limited supply even if a bug drains the backing BTC on the mainnet, but there might be a much bigger problem.

“Actually I suppose if it’s an inflation bug, the L-BTC is no longer in limited supply and you’re just rekt,” the developer said, as the whole industry awaits more details.

Nothing Moves on Liquid Network

In either case, other assets on the network, including USDT, have been unaffected, although they can’t be moved either. For example, bitcoin escrow service Tetrapolar informed its users that Liquid Network-powered “USDT deals will not work at this time.” The service said they’re not using L-BTC.

Some other users said they were lucky to swap L-BTC for onchain bitcoin before the incident happened. There aren’t many reports from affected users and platforms about how being unable to access their funds has affected them, except Sideswap, Aqua Wallet, and Stokr confirming that their users won’t be able to use Liquid Network for now.

The Silent Federation

Meanwhile, Liquid Federation members (81 in total), such as Bitfinex, Boltz, Hodl Hodl, Specter, Coinshares, Komainu, Xapo, Bull Bitcoin, Ledger, and many others haven’t issued public statements about the Liquid Network drama, including about L-BTC balances on their own books. (15 of the federation’s members run the secure infrastructure that proposes and signs blocks — with at least 11 of those 15 required to sign off on each one.) At the time of writing, even Blockstream CEO Adam Back, whose company created Liquid but is not a federation member and serves as its technical provider, hasn’t posted anything about the matter.

Therefore, the scale of the effects on the industry and its specific participants is unknown, while everyone is waiting until the network restarts. It’s also unclear at what price L-BTC will trade once peg-outs reopen, especially if the attacker returns not all the funds and someone will need to absorb the gap. In theory, this could be the federation, comprised of multiple major players in the cryptoasset industry; Blockstream (valued at $3.2 billion in 2021), the developer of Elements software, in which a bug was exploited; or just regular people holding this asset.

Until all these questions are resolved, both the Liquid Network and its native currency are in something of a Schrödinger’s state — they exist, but can’t be used for the time being.