Blockstream Refuses Ransom Demand for 598.5 BTC Still Missing From Liquid

Blockstream has said it will not pay the party or parties holding 598.5 BTC that remains outstanding after the recent exploit of the Liquid Network. In a Sept. 11 statement, the Bitcoin infrastructure company said it had tried to secure the return of the funds in good faith, but rejected the terms sought for their return. It described the taking and withholding of the bitcoin as theft rather than responsible disclosure and said it would pursue recovery through lawful channels if the funds are not returned in its statement.

The refusal follows a partial return of roughly 3,400 BTC on Sept. 7. Liquid's primary incident report, published Sept. 8, says 598.5 BTC, or about 15% of the amount that had been taken through the peg-out process, was still outstanding. The report identifies no individual or organization responsible. It says the people behind the exploit had represented themselves in a public Bitcoin transaction message as white-hat security researchers, a self-description that Blockstream now explicitly rejects.

Liquid has restored block production and network transactions, according to its latest public operational update on Sept. 10. Peg-outs, the process used to move bitcoin out of Liquid to the Bitcoin mainchain, remain disabled while the final recovery stage continues. The update does not give a date for their return or say that the BTC/LBTC reserve has been fully restored in the network's notice.

A physical Bitcoin coin, illustrating the asset involved in the Liquid reserve-recovery dispute. Image via Wikimedia Commons.

How unbacked LBTC reached the Bitcoin network

Liquid's account places the exploit at 15:53:10 UTC on Sept. 6, at Liquid block 4,050,336. It says a vulnerability in Elements, the open-source software used by Liquid, affected the way nodes cached range-proof verifications. The result was the creation of approximately 4,000 LBTC that were not backed by bitcoin held in the Liquid reserve according to the incident report.

LBTC is the Liquid asset at the center of the incident. The report frames the backing question directly: the improperly created LBTC was not matched by bitcoin in the reserve. It does not report that bitcoin on the Bitcoin mainchain was minted or that Bitcoin's own consensus rules failed. The failure described by Liquid occurred in the Elements software and then affected a Liquid-to-Bitcoin withdrawal path.

According to the report, the people responsible used SideSwap, a Liquid Federation member holding a peg-out authorization key, to exchange the unbacked LBTC for BTC through Liquid's standard peg-out mechanism. The key detail in Liquid's account is that the invalidity arose before a peg-out began. SideSwap's node and the federation's functionary nodes accepted the LBTC as valid at the transaction-validation stage, the report says. The functionaries then processed the withdrawal as authorized, released approximately 4,000 BTC through SideSwap's whitelisted Bitcoin address, and SideSwap forwarded the BTC to an address provided by the exploiters.

Liquid's description distinguishes that sequence from a compromise of its operators' keys. The federation said its functionaries were not hacked, no private keys were compromised, and the authorization mechanism for withdrawals to whitelisted addresses worked as designed. That is Liquid's account of the incident, not an independent forensic conclusion. The report attributes the loss to the validation vulnerability and the chain of accepted transactions that followed it, rather than to a stolen functionary key.

The reserve figures in the report show the scale of the disruption. Liquid said the reserve held about 4,205 BTC before the incident. After the exploit-related withdrawal and additional peg-outs processed before operations stopped, it said the reserve balance had fallen to 197 BTC. Those figures describe the reserve at the times specified in the report; they are not a current balance disclosure. Liquid's later recovery notices say restoration of the BTC/LBTC reserve remains in progress without publishing an updated reserve total in the Sept. 10 operations update.

The incident report also says other assets issued on Liquid, including USDT, were not affected by the vulnerability. They were temporarily unavailable while the network was paused, however. That distinction is limited to the reported software issue. It does not amount to a broader assurance about every possible operational effect of the network pause or the subsequent recovery process.

The partial return and disputed demand

Liquid said a patch was deployed to its bridge nodes at 01:09 UTC on Sept. 7, which it said made the vulnerability no longer exploitable. Later that day, at 16:09:25 UTC, the party or parties behind the exploit returned 3,400 BTC to the Liquid Federation peg wallet, according to the official incident update. The returned amount is confirmed by Liquid's own report; it does not establish the identity, motive, or legal status of the sender.

Liquid's Sept. 8 statement said discussions with the individuals were ongoing to recover the remainder. By Sept. 11, Blockstream said the terms offered in those discussions were unacceptable. Its public post did not state that an agreement had been reached, that it had paid a bounty, or that it had recovered additional bitcoin after the 3,400 BTC return. It instead called for the remaining bitcoin to be sent back and said it would not pay "a ransom for the return of stolen funds" in the company's statement.

The reported demand was a 10% bug bounty. The Block reported that an OP_RETURN message published on the Bitcoin mainchain asked Blockstream to pay 10% from its own money and linked to the relevant transaction. The message also claimed that Blockstream had spent $1.5 million, or potentially nothing, to secure $5 billion in assets. Those are assertions in an onchain message attributed to the person or people communicating about the exploit. Neither Liquid's incident report nor Blockstream's statement independently verifies the message author's identity, asset-security claim, or proposed valuation.

The distinction between disclosure and extortion is central to the public dispute. Liquid's Sept. 8 report recorded the self-applied white-hat label and said recovery discussions were in progress. Blockstream's later statement took the opposite view, saying taking assets without authorization and withholding them for payment was a crime and "not white-hat activity." The company said a bounty demand that exceeded its economic participation in the network would set an unacceptable precedent for open-source developers. Those are Blockstream's position and characterization; the statement is not a court finding or an announcement that the responsible people have been identified.

Blockstream said that, if the funds are not returned, it will work with law enforcement, exchanges, service providers, forensic specialists, and other relevant parties to trace and recover assets and identify those responsible. The company did not name an agency, exchange, or forensic provider in the public statement, nor did it announce a filed complaint or a completed recovery action. Its stated plan is prospective in the Sept. 11 post.

Software update and controlled restart

Liquid paused the network during the initial response. Its Sept. 8 report said the immediate priorities were recovering the missing funds and resuming normal operations safely, and advised users that they could not transact while the network was offline. It also said users did not need to take proactive steps to protect their funds at that point. The report asked node operators to watch for an emergency Elements release and follow its upgrade instructions.

That release arrived on Sept. 9. Liquid announced that Elements v23.3.4 addressed the proof-verification cache vulnerability by hardening the cache keys used for range proofs. It said the release had received multiple rounds of internal and external review, including reviews by Bitcoin Red Team and Alpen Labs, and recommended that Liquid node operators update in the v23.3.4 announcement. The announcement is the project's account of its review process and patch scope; it does not provide a complete independent security audit or a guarantee against future vulnerabilities.

The recovery plan described on Sept. 9 had three anticipated stages. First, the network would resume producing blocks while peg operations remained suspended. Next, it would replay transactions verified as valid. Finally, it would resume peg operations after the network state had been fully restored, including a return of funds. Liquid cautioned that the plan was under active development, could change as testing continued, and would advance only when the next stage was considered safe in the same release update.

On Sept. 10 at 10:00 UTC, Liquid said functionary and bridge-node updates had been deployed successfully and block production had resumed without transactions while the network was monitored. Functionary nodes were signing and validating blocks as intended, it said, while peg operations, including PAK-authorized peg-outs, remained suspended. That update did not say the recovery was complete. It specifically said work to restore the BTC/LBTC reserve was still under way in Liquid's operations notice.

Later on Sept. 10, at 19:55 UTC, Liquid said transactions had resumed. Its notice kept the distinction between ordinary network transactions and peg-outs: blocks were being produced, functionaries were signing and validating them, and transactions were again possible, but peg-outs remained disabled as a precaution. Liquid said further information about reopening peg-outs would be released when available. It did not supply a timetable, set conditions in public beyond the ongoing final recovery stage, or say whether any outstanding funds had returned in the later update.

What the current status confirms

The public record now supports several narrow conclusions. Liquid identified a cache-related range-proof verification vulnerability in Elements as the cause of the incident and says the bridge-node patch was deployed Sept. 7. It says approximately 4,000 unbacked LBTC was created, about 3,400 BTC was returned, and 598.5 BTC remained outstanding in its Sept. 8 accounting. Blockstream has since said it will not pay to obtain the remaining BTC and has described possible cooperation with law enforcement and tracing partners if it is not returned.

It does not support a claim that the person or people who sent the onchain message have been identified, that their white-hat characterization has been verified, or that the remaining BTC has been recovered. It also does not support a claim that peg-outs have reopened. The latest official Liquid notice says users can transact on the network, while peg-outs stay disabled and recovery work continues. Liquid again advised users to rely on its official channels and not to disclose private keys or seed phrases or send funds in response to unsolicited messages in the Sept. 10 notice.