Blockstream Refuses a 10% Bounty for Liquid's Missing 598 BTC

Blockstream will not pay. The company said on Friday that it refuses the bounty demanded for the bitcoin still missing from its Liquid sidechain, and told the people holding the coins to send them back. About 598.5 BTC, worth roughly $47 million, has been outstanding since 7 September, when the party that emptied the federation wallet returned 3,400 coins and kept the remainder. What was asked for is 10% of the total, paid out of company funds, against a threat that Liquid holders would otherwise absorb a permanent 15% loss.

The demand arrived in a transaction

Every exchange between the two sides has run on chain, in OP_RETURN, the small field a bitcoin transaction can carry a short message in. The holders framed their 10% as a bug bounty. The Block, quoting that message, reports the arithmetic they offered for it: Blockstream had spent "$1.5 million, maybe even 0" to secure "$5 billion in assets". That passage sits in one account. Blockstream's reply was not a negotiation.

"Taking assets without authorization and withholding their return is a crime, not responsible disclosure. It is not white-hat activity. It is theft," the company said.

Return the bitcoin, the statement told them. Bitcoin.com News alone adds a line about bitcoin being hard money that cannot be minted without cost, and about not haircutting users to pay a ransom. CryptoNewsZ alone has the company objecting to a precedent in which open-source developers are made to pay ransoms larger than their stake in a project. Neither line has a second source.

Three answers to one question about the chain

Whether ordinary Liquid transactions are moving depends on which desk is read. The Block says block production and transactions both resumed on 10 September, with peg-outs disabled through what it calls a final recovery phase. Cointelegraph, filing at 08:43 UTC on Friday, says the chain came back on Thursday producing empty blocks, and that transactions and cross-network transfers remain suspended. Parameter dates the restart to 11 September instead. CryptoTimes gives a time, 12:26 UTC on 10 September, on Elements v23.3.4, the emergency patch federation members installed. Those accounts do not reconcile, and the chain was still listed as paused on Wednesday. All five agree that peg-outs are off.

The bug, and the two clocks

The flaw sat in how Liquid nodes cache range-proof verifications, the check on the cryptographic proofs that keep transaction amounts hidden on the sidechain. The federation's incident report puts the exploit at Liquid block 4,050,336 at 15:53:10 UTC on 6 September. SideSwap, the venue the invalid L-BTC was pegged out through, timestamps the same event at 13:53 UTC. Nobody explains the two hours between them. Parameter describes the same flaw as a cache-key collision in confidential transaction verification. CryptoTimes puts the federation reserve at about 4,205 BTC before the exploit and 197 BTC after it, and no account says federation keys were taken.

Back says the peg gets covered, without a payer

Adam Back, Blockstream's chief executive, wrote on 10 September that the L-BTC to BTC one-for-one peg will be covered, and told holders not to dump L-BTC over the counter. He attached no figure to that and named nobody who pays. A promised post-mortem has no date on it. Blockstream says it will work with law enforcement, exchanges, service providers and forensic specialists to trace the coins, and CryptoNewsZ renders the commitment as every legal option available. Bitcoin.com News carries a claim from Calle, a co-lead of the Bitcoin Red Team, that the group had flagged the vulnerability to Blockstream before it was used. That claim carries no date and no second account.

So the shortfall between what the federation owes L-BTC holders and what it holds is unchanged, three days after most of the money came back. Blockstream has ruled out closing it with a payment, and Back says the peg gets covered anyway. Those two statements have not been squared in public. The coins sit where anyone can watch them, on a chain that records every move and settles nothing.