Liquid Network restarts after $320M hack, but peg-outs remain frozen — What’s happening?

After a major hack drained roughly $320 million from its federation wallet, Liquid Network is gradually seeing a comeback.

Though full operations have not been resumed yet, block production has been resumed, with functionary nodes successfully signing and validating blocks. On 10th September, Liquid restarted block production. However, it initially kept transactions disabled.

By later in the evening, the network had progressed further and transactions had resumed. This suggested that users could once again transact with assets already on Liquid. However, in this process, transactions were initially kept paused during the monitoring stage to ensure stability. 

A look at the remaining steps

A few key measures are yet to be taken care of. These include the peg-outs which have been disabled. For context, a peg-out is the process of moving LBTC from Liquid back to the Bitcoin [BTC] network while receiving BTC in return.

This means that while users can now make transactions within Liquid, they cannot withdraw their LBTC back to the Bitcoin main chain through the normal peg-out process.

This has been done intentionally to ensure safety and avoid another attack. Blockstream is likely to keep this function disabled until it is confident of the Liquid network’s internal state. Also, it will make sure that the BTC/LBTC reserves have been correctly restored and verified.

The reason for all this caution is a proof-verification cache vulnerability that affected Liquid’s underlying Elements software. Here, it’s worth noting that the Emergency Elements v23.3.4 release was created to fix this vulnerability. It does so by strengthening the cache keys used when verifying range proofs. 

Ethics over shortcuts?

At the same time, Blockstream has claimed that it “will not pay a ransom for the return of stolen funds.” According to Adam Back’s blockchain technology company, taking the funds was theft, not legitimate “white-hat” hacking.

While it has tried to negotiate in good faith, it will now instead work with law enforcement, exchanges, blockchain investigators, and security experts. This, in an effort to trace and recover the stolen BTC. 

We have engaged in good faith in an effort to secure the return of stolen user funds and protect the broader Bitcoin community. That effort should not be mistaken for acceptance of the actions taken nor of the terms being demanded.

This statement coincided with AMBCrypto recently reporting that the Liquid Network’s recovery took a positive turn after white hat hackers returned 3,400 BTC, worth about $268 million.

In other words, roughly 85% of the Bitcoin withdrawn during the incident has been restored. As it stands, around 598.5 BTC has been kept in a separate wallet as an unofficial bounty.

Final Summary

• On 10th September, the Liquid Network restarted block production but initially kept transactions disabled.
• All the recovery patches were done with caution due to a proof-verification cache vulnerability.