The liquid dashboard just updated:

holy! I guess federated multi-sig was security theatre all along, if you can just spoof the whitelist and get such a massive transaction processed, wow! Was every member asleep at the wheel?

So all users, all wallets, and all exchanges balances are now unbacked, this network is fried!

Darth is somwhere laughing his ass off right now

Comment from the SideSwap telegram chat!

Statement on today's Liquid incident

Today at 14:05 UTC a customer sent 4,000 L-BTC to the SideSwap peg-out service. Our service processed it like any other order: the L-BTC was burned on Liquid with a valid peg-out authorisation, and at 14:28 UTC the Liquid Federation paid 3,996 BTC to the customer's Bitcoin address.

Blockstream has since established that the L-BTC in that order was created through a bug in the Elements software. As Blockstream stated, SideSwap's peg-out authorisation key was not compromised, and nor was any SideSwap system. Our service had no way to tell those coins from any other L-BTC.

What this means for you:

• Your wallet is not affected. SideSwap is non-custodial and your assets are controlled by your own keys. There is nothing you need to do.

• Liquid is paused by the Federation, so swaps, peg-ins and peg-outs are paused in SideSwap until the network resumes.

• Peg-outs already paid on Bitcoin are complete. If you have a peg-in or peg-out that has not completed, email hello@sideswap.io with your transaction id and we will handle it individually.

Blockstream and the Liquid Federation are leading the network-level response, including how and when the network restarts. We will not speculate on that.

The team is offline overnight. We will answer questions here and by email from tomorrow morning (UTC). Please do not send any new peg-in or peg-out deposits until we say services are back.

Statements: x.com/Liquid_BTC and x.com/side_swap

Liquid was always a shitcoin.

This re-enforces and just proves further that bitcoin is secure.
With the inflation bug that was exploited in monero and now liquid, also rumored zcash in the past; the theme is that confidential transactions introduce complexity and a large attack surface for exploitation. What many said was one of Bitcoins flaws (lack of onchain privacy) actually is its strength. The trade-off of going without confidential transactions onchain, in exchange for solid transparency and security.

Privacy can still be achieved via coin control, coinjoin, payjoin, coinswap, lightning. This liquid hack only proves further how secure Bitcoin really is. Bitcoin does not use confidential transactions which resulted in hacks of things which do like monero, Liquid, (zcash?). I was a fan of liquid network, though going forward I lack confidence in confidential transactions on anything.

Seem blockstream.info/liquid/ is still stacking blocks

Oooooo damn

lol, couldn't happen to a nicer bunch...

The lack of circuit breakers for large transactions or many small ones adding up at SideSwap is almost as much of a piss-off as the bug leading to the extra LBTC here.

A real shame. After big blocks lost in the blocksize war I liked the liquid side chain for handling small amounts of bitcoin to reduce pressure and incurring of fees on layer 1. Peg-ins were a nice way to dispose of smallish UTXOs vs the privacy loss of consolidating and there were some privacy benefits to consolidating LBTC on Liquid.

Several things about lightning don't work great for me, I can't keep a watchtower online all the time and rocking a mobile wallet + the data usage as a monitoring node is not something I want to do as I'm trying to resist the smartphonification of everything.

Liquid was nice for spending smaller amounts on lightning from time to time because there were exchange smart contracts out there like Boltz (gone but there was swapmarket) where you could pay lightning invoices with LBTC and even make lightning invoices.

Another thing about lightning is having to maintain multiple channels to have workable liquidity. Not really a great end-user technology, a layer to build on.

Even if I'm keeping a channel open, the smart contracts for trading lightning-LBTC were nice as I could leave a lightning channel in a relatively low balance state (less worry about the other party in the channel / watchtower needs) -- I could then fund it quickly and easily when I needed it.

Even if there really is a whitehat here who gives everyone a happy ending, Liquid ecosystem will be pretty damaged.

I guess we've got the world of bitcoin eCash as a substitute (cashu, fedimint). Instead of one really big federation with support from Blockstream it entails working with a bunch of smaller custodians and micro federations. Painful if needing to spread nuts across them / figuring out how much trust they are worthy of.

Also no updates on boltz swaps infrastructure? I am shocked how few people are upset by this. I guess everyone holds ETFs now?

Liquid wallets will be impacted

This is the end of Liquid. I can't see how anyone will trust them going forward and how tokens like USDT can be salvaged. So much incompetence by Adam Back's SideSwap. Shit, shit, shit.

In this era of AI, I think becoming an ossification-ist is going to be the only reasonable solution.

Sigh I was a fan of liquid and Coldcard. What’s next? My NWC gets compromised and all my sats are drained?

Something isn't making sense in my grug brain though:

This is the Liquid federation wallet address listed on Liquid's explorer:

bc1qdlld6antmv4xug242ed83q7k4rqw50cwfns38szx4qu2f4jwaxxsuhwxxr

If you check it out on mempool.space it shows that there is a transaction spending out of it to a new address:

bc1ql4mfu6aundtkksxklfajs2h3t9nzcd6gyqjlte

Now there is a new transaction at this address with OP_RETURN "please contact security@blockstream"

Did the original transaction spend funds back into the liquid federation?

So my liquid wallet currently unchanged... So I assume that any l-btc in there is basically backed by zero btc. And frozen till they figure out what to do.