Suspected Cache Bug Could Be Behind Liquid Network's $320M Bitcoin Drain

Security researchers say a suspected flaw in Liquid's transaction-validation cache may help explain how roughly $320 million worth of Bitcoin exited the network. Liquid's LBTC is designed to be backed 1:1 by BTC held by the network's federation. SideSwap reported that on Sept. 6, a customer submitted 4,000 LBTC via its peg-out service, which then released about 3,996 BTC. Liquid said no SideSwap peg-out authorization key or other federation key was compromised. Developer Calle attributed the incident to a range-proof issue. Range proofs allow nodes to confirm confidential transaction amounts stay within an allowed range; without such checks, a hidden negative output could offset a larger positive output. Because verifying range proofs is computationally expensive, nodes cache successful checks. Calle said an attacker could craft an invalid output and proof that collide with a cache key from a prior valid check, causing a node relying on the cached result to skip the verification that should have rejected the output. Charles Guillemet backed the theory, describing a deliberately engineered cache-key collision that let an invalid confidential transaction pass a range check. Calle noted his explanation simplifies the underlying mechanism and may contain errors. Separately, Stu's transaction reconstruction pointed to setup transactions preceding an allegedly invalid transaction in Liquid block 4,050,336. Stu said the transaction minted about 3,996.0183 LBTC before the SideSwap withdrawal. Mononaut said the exploited bug had entered Elements' master development branch the prior week and was not present in any tagged release. Mononaut added that Liquid federation functionaries apparently ran that code: while other nodes rejected the invalid transactions, federation functionaries accepted them, approved the withdrawals, and continued producing blocks. Other nodes—including those feeding Liquid's mempool explorer—rejected the affected block, which could explain why the explorer omitted transactions visible elsewhere. Blockstream has not confirmed the claimed deployment details in statements available so far. If verified, the software rollout would become a central factor in the incident. The entities controlling the withdrawn bitcoin described themselves as whitehats and said they would return most of the funds once the bug was fixed across affected nodes. Public reporting has not confirmed a completed return or a full patch rollout.