Liquid Network Investigates Flaw Behind 3,996 BTC Withdrawal
The flaw related to Liquid a Network allowed the unauthorized withdrawal of 3996 bitcoins, valued at nearly 320 million dollars. Since then, the perpetrators have already returned 3400 BTC, however the exact technical origin and the fate of the remaining 598.5 BTC remain unknown.
In brief
- 3996 BTC exited Liquid Network during an unauthorized operation.
- The multisignature was not compromised, a software flaw is favored.
- Analyses especially examine the PAK control and the Zero-Knowledge Proofs verification cache.
- The perpetrators, who present themselves as white hats, have returned 3400 BTC.
- About 598.5 BTC remain unreturned, while the exact technical cause remains unknown.
The Liquid multisignature was not broken
Liquid works as a Bitcoin sidechain. Users lock bitcoins to receive L-BTC. Then, they perform a withdrawal by conversion to recover their funds on the main blockchain.
On September 6, a transaction caused the withdrawal of nearly 3996 BTC. The federated Liquid network signed the operation, as the system interpreted it as a valid withdrawal by conversion. Nevertheless, Blockstream assures that the multisignature cryptographic keys and those used to authorize withdrawals have not been compromised.
Four facts measure the scale of this incident :
- Nearly 3996 BTC were withdrawn during the main operation ;
- The transaction appears in Bitcoin block 965783 ;
- The federated wallet dropped from around 4205 to 203 BTC ;
- The Bitcoin main blockchain was not compromised.
The flaw linked to Liquid Network is located in the software that verifies the legitimacy of operations. The keys of the eleven signatories were not stolen as they were not coerced. They therefore authorized a request that the system presented to them as valid.
The funds passed through SideSwap, a service authorized to perform withdrawals by conversion. SideSwap then indicated that the L-BTC used came from a bug in Elements, an open-source software underlying Liquid, and not from its own systems.
The PAK control is a first hypothesis
The security report identifies the PAK mechanism as an area to examine. It is a system that links each withdrawal by conversion to an authorized destination through cryptographic proof. Any request to an address absent from the whitelist should normally be rejected.
A detailed analysis of the code reveals that this verification appears under various conditions. The report then considers the existence of a branch where the control might not apply. An unauthorized operation could be considered valid before reaching the signatories.
Nevertheless, this explanation remains a hypothesis. The document indicates that the phases regarding the bypass of the PAK control are not confirmed. Blockstream has therefore not published the exact cause or the method used.
A separate investigation by Bitquery however points to the verification cache of zero-knowledge proofs. The concerned address reportedly performed 68 times the registration of an identical proof before the creation of the L-BTC used for the withdrawal. A correction related to this cache had been added to the code before the incident, but it was not in the latest public version.
It is not yet possible to definitively identify the flaw from the two analyses. However, they reveal that the hackers certainly did not break the multisignature. They probably fooled a software layer located upstream.
The perpetrators still keep about 598.5 bitcoins
After their offense, a message was inserted by the perpetrators in a Bitcoin transaction. They state in the OP_RETURN field:
We are white hats. Contact us on the blockchain.
Then, Blockstream provided a response through messages signed with its PGP key. The perpetrators requested that each node be corrected before returning the funds. Finally, the company specified that the bridge nodes had received a fix and that it was safe for the funds to be returned.
On September 7, a verified transaction on the blockchain transferred 3400 BTC to the federated wallet. Nearly 598.5 BTC were sent back to another address controlled by the perpetrators, about 48 million dollars at the current rate.
Nothing publicly confirms that the 598.5 BTC constitute a negotiated bounty. As long as Blockstream does not disclose their status, they must be considered unreturned. The blockchain was still suspended at the time of the last checks, without a new public version of Elements containing the fix.
The next step will be to publish the technical cause, proceed with the audit of the fix, and restore full coverage of the L-BTC. Without these guarantees, returning a major part of the funds is not sufficient to close the incident.
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Diplômé de Sciences Po Toulouse et titulaire d'une certification consultant blockchain délivrée par Alyra, j'ai rejoint l'aventure Cointribune en 2019. Convaincu du potentiel de la blockchain pour transformer de nombreux secteurs de l'économie, j'ai pris l'engagement de sensibiliser et d'informer le grand public sur cet écosystème en constante évolution. Mon objectif est de permettre à chacun de mieux comprendre la blockchain et de saisir les opportunités qu'elle offre. Je m'efforce chaque jour de fournir une analyse objective de l'actualité, de décrypter les tendances du marché, de relayer les dernières innovations technologiques et de mettre en perspective les enjeux économiques et sociétaux de cette révolution en marche.
The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.