Liquid Network releases 3,996 BTC after L-BTC burn, risking peg discount when peg-outs reopen

Nearly $320 million in Bitcoin walked out of the Liquid Network’s federation wallet on September 6, and nobody has gotten it back yet. The incident saw 3,996 BTC pegged out from the Bitcoin sidechain operated by Blockstream after a corresponding burn of Liquid Bitcoin (L-BTC). The federation’s reserves, which held roughly 4,200 BTC before the event, dropped to approximately 197 BTC. That’s a 95% decline in a single transaction processed around 14:28 UTC. What actually happened The sequence started when SideSwap, a decentralized exchange built on Liquid, facilitated a customer submission of 4,000 L-BTC at 14:05 UTC. Twenty-three minutes later, 3,996.01834922 BTC left the federation’s multisig reserves on the Bitcoin mainnet through what’s known as a Peg-out Authorization Key, or PAK. Both Blockstream and SideSwap attributed the withdrawal to a bug in the Elements node software, the open-source codebase that powers Liquid’s infrastructure. Not a compromised key. Not an external hack. A software flaw that allowed the peg-out to process in a way it shouldn’t have. Liquid operates on an 11-of-15 federation model, meaning 11 of 15 designated entities must sign off on peg-outs. The bug ap...