SideSwap Explains How Software Bug Led to Nearly 4,000 BTC Transfer

Highlights:

• A customer used SideSwap to move 4,000 L-BTC from Liquid back to the Bitcoin network.
• Blockstream later found that the L-BTC involved had been created because of a software bug.
• Liquid services remain paused, while SideSwap says its own systems and user wallets are safe.

SideSwap, a non-custodial Bitcoin exchange and wallet on the Liquid Network, has explained its role in the recent incident involving nearly 4,000 BTC. Liquid is a Bitcoin-based network that lets users move Bitcoin faster and use it for different types of transactions. In a September 7 post on X, SideSwap said a customer sent 4,000 L-BTC to its service at 14:05 UTC. The customer wanted to move the funds from Liquid back to the main Bitcoin network.

SideSwap said the transaction looked normal, so its system processed it. At 14:28 UTC, the Liquid Federation sent 3,996 BTC to the Bitcoin address the customer provided. The difference came from SideSwap’s 0.1% service fee, equal to about 4 BTC on the 4,000 L-BTC transaction. 

Statement on today's Liquid incident

Today at 14:05 UTC a customer sent 4,000 L-BTC to the SideSwap peg-out service. Our service processed it like any other order: the L-BTC was burned on Liquid with a valid peg-out authorisation, and at 14:28 UTC the Liquid Federation paid…

— SideSwap (@side_swap) September 6, 2026

Software Bug Created the L-BTC

Blockstream later found that the 4,000 L-BTC involved in the transaction had been created because of a bug in the Elements software, which powers the Liquid Network. SideSwap said it could not detect the problem when it received the transaction because the L-BTC looked like normal coins. The company also stressed that its own systems were not hacked and its authorization key remained secure.

Liquid Network Remains Paused

The Liquid Federation has temporarily paused the network while Blockstream works on the issue. Because of the pause, SideSwap has also stopped swaps and transfers between Bitcoin and Liquid. SideSwap said users do not need to take any action with funds already held in their wallets. The platform is non-custodial, meaning users remain in control of their own assets.

Users with unfinished Bitcoin or Liquid transfers have been asked to contact SideSwap with their transaction ID. SideSwap also warned customers not to send new deposits until Liquid services are officially restored. Blockstream and the Liquid Federation are now handling the wider network issue and will decide when Liquid can safely restart.

The incident also affected a large share of the Bitcoin backing Liquid. Before the withdrawal, the federation wallet reportedly held around 4,200 BTC, meaning the nearly 4,000 BTC moved represented about 95% of its Bitcoin reserves. Liquid also asked exchanges to pause L-BTC deposits and withdrawals. However, the network said other Liquid assets, including DePix, USDT and real-world assets, were not affected.

White Hats Say Bitcoin Will Be Returned After Liquid Fix

On-chain data shows the address linked to the purported white hats holds about 3,998.5 BTC. This includes nearly 3,996 BTC from the main Liquid transaction, along with about 2.5 BTC received through earlier smaller test transactions. The group has told Blockstream that it plans to return most of the Bitcoin, but only after the Elements software bug is fixed and Liquid nodes are properly updated. Blockstream has acknowledged the request, while Liquid remains paused as work on the fix continues.