Bitcoin side chain anomaly causes a brief safety failure

A failure in Liquid’s bridge, the BTC network created by Blockstream, resulted in a 2-of-3 multi-sig contract that temporarily controlled more than 870 BTCs, worth $8 million.

The event was detected on June 26 by James Prestwich, founder of Blockchain’s software development company Summa, which contributed to the tBTC project.
According to his findings, the spending script for the transaction was configured to transfer control to a simple 2-of-3 multi-signature contract after 2,015 blocks or about two weeks. Although this is an expected behaviour, it is only intended to be activated as a last resort if the Liquid network were to collapse, as explained in its documentation.

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Prestwich found the problem just as the waiting period expired, creating a window of about thirty minutes, or three blocks of Bitcoin, during which the emergency Multisig could have taken control of the money.

Eventually this did not cause a loss of funds as the emergency multisig is handled by Blockstream. The amount of BTC noted was later moved to a new UTXO that reset the emergency multisig timer.

Security model failure
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The Liquid network is much more centralized than Bitcoin and many other blockchains, as it is supported by a relatively fixed and non-transparent federation of commercial entities, mainly exchanges.

The federation also has custody of the crypto-currencies used on the Liquid bridge, as this is the easiest way to link it to other chains. Normally, funds are exchanged through a more distributed 11-of-15 multi-sig contract, which is signed by the members of the federation.

The federated security model is intended to be an improvement over the retention of funds within an exchange, as previously reported by Cointelegraph.

In a conversation with Cointelegraph, Prestwich stressed the importance of the incident:

„This was not a normal operation. If anyone says it was, they are wrong. He directly contradicts his documents and public statements.

The review found that, over a short period, a significant portion of Bitcoin Rush funds had „significantly diminished security“, as only one company controlled them. The issue appears to be a result of the „code written by Blockstream and run by the members of the federation“, which is supposed to automatically renew each transaction before the two-week period arrives.