Researchers examining a $320 million incident on the Liquid Network have identified an alleged failure in the sidechain's transaction-validation cache that may explain how unbacked tokens passed security checks.
According to technical accounts, the flaw involved Liquid's range-proof verification system, which prevents nodes from accepting invalid transaction amounts. Range proofs check that hidden transaction amounts fall within allowed ranges without revealing those amounts. Because these checks are computationally expensive, nodes cache successful verification results for reuse.
Researchers describe how an attacker could construct an invalid output and proof matching the cache key of a previously valid check. A node finding that cached result would skip the verification that should have rejected the inflationary output.
The incident centered on a withdrawal processed by SideSwap on September 6, in which a customer submitted 4,000 L-BTC through its peg-out service, prompting the release of approximately 3,996 BTC. Liquid's federation confirmed that neither SideSwap's peg-out authorization key nor other federation keys had been compromised.
A separate technical reconstruction identified setup transactions followed by an allegedly invalid transaction at Liquid block 4,050,336, which reportedly created approximately 3,996.0183 L-BTC before the subsequent withdrawal.
Deployment Questions
Technical accounts also raise questions about software deployment. According to one analysis, the exploited bug had entered Elements' master development branch the previous week but had never appeared in a tagged release. The account suggests Liquid's federation functionaries may have run that development code, while other nodes rejected the invalid transactions.
This reported divergence between nodes accepting and rejecting the transaction could explain why some Liquid systems recognized the transactions while others did not. Establishing which code versions ran on federation nodes and how their validation behavior differed would be central to understanding the failure.
Resolution Path
The actors controlling the withdrawn Bitcoin have identified themselves as whitehats and conditioned the return of most funds on the bug being fixed across affected nodes. Recovering the Bitcoin would address the reserve shortfall, while demonstrating that corrected software rejects invalid transactions would address the underlying validation failure.
