Liquid gets most bitcoin back, without a control point

The address that emptied Blockstream's Liquid federation wallet on Sunday has broadcast most of the haul back after a negotiation conducted entirely inside bitcoin transactions, according to The Defiant, sending 3,400 BTC, about $268 million, to the federation address and 598.49955894 BTC, roughly $47.2 million, back to the address that took it — a 15 percent cut of the 3,998.50 BTC withdrawn. As of 15:50 UTC Monday the return was still unconfirmed; if it confirms, the federation wallet will hold 3,597.47 BTC.

Blockstream opened the channel at 19:31 UTC Sunday with a 1,000-satoshi OP_RETURN message asking the other side to contact security@blockstream.com, then sent two encrypted messages early Monday, the second labeled as encrypted to the key behind the attacker's address. At 02:20 UTC Monday the counterparty answered in the clear, asking whether sending most of the balance back to a specific address was acceptable; Blockstream's PGP-signed reply was "Yes, thank you," and a later message said bridge nodes were patched and the funds were safe to return. The 3,400 BTC transaction followed, and as of Monday's reporting nothing either side had published onchain assigned a figure to what the attacker keeps or called it a bounty, with two further encrypted messages sitting unconfirmed in the mempool.

SideSwap, the Liquid Federation member whose peg-out authorization key was used, supplied the operational account: a customer sent 4,000 L-BTC to its peg-out service at 14:05 UTC, the L-BTC was burned on Liquid under a valid peg-out authorization, and the federation paid 3,996 BTC to the customer's bitcoin address at 14:28 UTC. Blockstream traced that order's L-BTC to a bug in the Elements software, and SideSwap says neither its key nor any of its systems were compromised. A separate 2.5 BTC peg-out to the same address preceded the order, putting the two peg-outs at 3,998.4975 BTC.

The partial recovery eases the immediate loss but has not produced the control point a custody client needs: The Defiant reports Blockstream has said nothing publicly since Liquid's first statement Sunday evening, and SideSwap's account frames the whole movement as valid federation mechanics. The network's assurance that no key was stolen never answered the harder question of which named party controlled the funds, and the clawback does not create that answer. The strongest control in the episode was an OP_RETURN mailbox and the counterparty's willingness to send most of it back; the 15 percent that now stays with the address that drained the wallet is the price of that absence, one no qualified custodian's client should pay.