Liquid Attacker Keeps $47 Million: White-Hat Bounty or Extortion?

Original | Odaily News (@OdailyChina)

Author | Asher (@Asher_ 0210)

On Sept. 6, an attacker exploited a vulnerability in the Elements software to mint approximately 4,000 LBTC out of thin air, then used SideSwap's normal withdrawal channel to swap roughly 3,998.5 BTC, worth about $320 million, from Liquid's multisig wallet.

However, the attacker later left a message in a Bitcoin transaction: "We are whitehats. Contact us on chain." After Blockstream patched the vulnerability, the attacker returned 3,400 BTC but kept approximately 598.5 BTC, worth about $47 million, in addresses under their control.

Blockstream is currently communicating with the attacker to recover the remaining 598.5 BTC, and the company has not officially confirmed it as a bug bounty.

Returning 85% and keeping 15%—is this a costly white-hat operation, or is the attacker using the return of funds as leverage to award themselves a massive payout?

Minting LBTC Out of Thin Air to Swap for Nearly 4,000 Real BTC

Liquid Network is a Bitcoin sidechain launched by Blockstream in 2018. Unlike the Lightning Network, which primarily serves everyday payments, Liquid is geared toward Bitcoin settlement between exchanges and institutions, while also supporting the issuance of digital assets such as stablecoins and securities. The number of institutions participating in Liquid's governance and operations has grown from an initial 23 to 87, and the total value of RWA assets issued on Liquid now exceeds $5 billion.

On Sept. 6, Liquid suffered its most severe security incident since launch, with the withdrawals completed in two transactions. The attacker first withdrew about 2.5 BTC as a test, then moved approximately 3,996 BTC. The two transactions accounted for about 95% of the multisig wallet's Bitcoin reserves before the incident, leaving only about 197 BTC in the wallet at one point. Liquid immediately shut down bridge nodes, the network was paused, and several exchanges halted LBTC deposits and withdrawals.

The incident did not involve a leak of the multisig wallet's private keys, nor was SideSwap's Peg-out Authorization Key stolen. The real issue lay in the Elements software underlying Liquid.

According to information disclosed by SideSwap, the attacker exploited a vulnerability in the Elements software to mint approximately 4,000 LBTC with no real BTC backing, then sent them to SideSwap's Peg-out service. To the system, these vulnerability-minted LBTC were indistinguishable from legitimate assets. SideSwap therefore burned the LBTC and submitted a withdrawal request as usual, and Liquid's multisig wallet paid out the corresponding real BTC to the attacker's address.

In simple terms, the attacker did not directly breach the wallet holding the BTC, but instead created "fake LBTC" that could fool the system, then swapped them for real BTC through the normal withdrawal channel.

Liquid's multisig wallet uses an 11-of-15 scheme, meaning a withdrawal requires approval from at least 11 of the 15 multisig members. But this incident shows that multisig can only confirm a withdrawal received enough authorizations; it cannot determine whether the LBTC entering the withdrawal process was minted through a vulnerability. When the asset verification step fails, any number of subsequent signatures may still approve an erroneous transaction.

A Negotiation Conducted on the Bitcoin Blockchain

After moving the funds, the attacker left a message in the OP_RETURN field of a Bitcoin transaction: "we are whitehats. contact us on chain."

Blockstream sent 1,000 satoshis to the attacker's address, requesting they contact the security team. The two parties then communicated on-chain via OP_RETURN, PGP signatures, and encrypted messages. The attacker stated they were willing to return "most of the funds" after the vulnerability was patched, and demanded that Blockstream ensure all bridge nodes were updated. Once the fix was complete, Blockstream informed the attacker via a signed message: "Bridge nodes have been patched, and it is safe to return the funds."

On Sept. 7, the attacker transferred 3,400 BTC back to Liquid's multisig wallet, while moving the remaining approximately 598.5 BTC to addresses under their control. However, the publicly available on-chain information contains no agreement on how much BTC the attacker could keep, nor was the 598.5 BTC negotiated as a bug bounty.

Liquid's latest security incident report shows that Blockstream is still communicating with the attacker to recover the remaining 598.5 BTC. This suggests that Blockstream's earlier agreement for the attacker to return "most of the funds" does not mean it accepts the attacker keeping BTC worth about $47 million. At least in the current official stance, these funds remain assets to be recovered, not a confirmed white-hat bounty.

$47 Million: Bounty or Extortion?

Supporters of the attacker argue that if a malicious hacker had discovered the vulnerability first, Liquid could have lost its entire Bitcoin reserve. The attacker demanded Blockstream complete the fix first and ultimately returned 85% of the funds. Even if nearly 600 BTC are never returned, Liquid still avoided a worse outcome compared to losing all funds.

Cøbra, the anonymous owner of Bitcoin.org, believes white hats deserve rewards commensurate with the losses they prevent; SlowMist founder Cos also suggested that future large-scale thefts could gradually form a consensus of "starting at 15%" for return bounties. In their view, higher bounties incentivize vulnerability discoverers to return funds rather than keep them all.

The root of the controversy lies in the "process"—traditional white-hat disclosure typically involves reporting the vulnerability first, with the project paying a reward based on established rules or negotiation; the Liquid attacker, however, withdrew nearly the entire reserve first and then unilaterally kept 15%. Ledger CTO Charles Guillemet therefore questioned whether this approach is closer to demanding payment in exchange for returning funds, rather than normal white-hat behavior.

For Liquid, recovering 3,400 BTC only temporarily alleviated the reserve crisis. The fix for the vulnerability has entered internal and external review, and the team plans to urgently release Elements v23.3.4, after which Functionary operators will complete network adjustments, reject the previously invalid Peg-out, and restore network operations.

Whether the remaining funds can be recovered and when Liquid will fully resume operations remain to be seen. But the latest official statement has made the controversy clearer: the attacker may call themselves a white hat, but they cannot unilaterally define the withheld $47 million as a bug bounty.