Why keep private key and not necessarily protect cryptocurrency from being stolen

On September 6, nearly 4,000 Bitcoin s were removed from the Liquid network's stockpile. Although this withdrawal went through a network approval process, the authorized private key was not stolen and the problem arose in software itself: it approved an unapproved drawdown. This event is important because it breaks a long-held notion that preserving private key , means protecting assets.

Stealing without the keys

Liquid is a stand-alone blockchain that allows users to store Bitcoin in a common pool, exchanging an equivalent amount of L- BTC for token for faster and more private transfers. When the user redeems token , the corresponding smart contract is released from the pool. The design itself operated for many years until attackers discovered a shortcut.

According to on-chain analytics company TRM Labs' reconstruction of the incident, an attacker exploited a flaw in software to fabricate L-8 BTC s from scratch without storing corresponding Bitcoin s and then converted these uncorrupted token s into genuine Bitcoin . The operator responsible for approving the submissions based on contaminated misinformation was equivalent to several signatories simultaneously verifying one erroneous ledger.

private key is still the authorization key for transactions, and storing it will be essential. But this incident shows that even if private key is safe, software can still use these keys to enter a wrong transaction.

The fact that the company has insurance doesn't mean you are covered.

Many people entrust assets to a financial services institution, with the default party both responsible for custody and liable in case of failure. Insurance can indeed support such liability, but terms determine how much it actually covers.

Coinbase provides good references in its public policy. The company states that its criminal insurance protects portions of the digital asset from being stolen, including losses caused by cyberattacks, and explicitly warns that total damages may exceed the insured's payment limit even if an accident is covered. In addition, the policy does not cover loss of unauthorized access to accounts due to loss or leakage of credentials for logging into a personal account.

Thus, the first question to be clarified is whose losses are covered by the policy. If your insured party is a company that manages Bitcoin , then it's this company and not you who has contracted with the insurance company. Whether or how you can claim directly depends on specific arrangements and applicable laws.

software How to determine account attribution when an error occurs

private key Secure software Theft, not necessarily insurable. digital asset Criminal insurance provided by Relm, an insurance company that specializes in serving crypto businesses, specifically covers the exploitation of infrastructure vulnerabilities and theft involving smart contract . It also offers technology professional liability insurance to cover claims arising from defects in a company's product or service, but this type of insurance acts as a response to accountability rather than directly compensating for lost assets.

Imagine a scenario: A custodian relies on another company to handle software withdrawals, and the software vulnerability results in loss of funds. The custodians may initiate their own insurance claims or be held liable for payments owed by them to software , which is either insured against liability or able to pay it off.

The Liquid incident itself also confirms that asset recovery and division of liability are two different things. According to Bitquery's investigation, the attacker returned 3,400 coins Bitcoin on September 7; CryptoSlate reported on September 12 that Blockstream refused to pay a bounty request.

The dollar loss is not equal to Bitcoin

Even if the amount of compensation is negotiated, there's still a question: what is it? Users holding Bitcoin expect to get back the same number of coins, but the compensation agreement may be in dollars.

Assuming that an Bitcoin worth $80,000 is lost, the compensation is fixed at $8,000 and when the coin price has risen to $100,000, the user receives only 0.8 coins back. The dollar is sufficient but holds less than one-fifth of it. Conversely, if the currency falls in value, the same dollars can be bought back more.

These complexities expose the limits of what a user can do with his or her own homework. Few people are able to review and approve Bitcoin 's proposed code, software , much less compare it to an insurance policy that they may never see. Service providers should be as clear about compensation arrangements as they are about fees: which losses will be promised in coins or dollars; when there is insufficient coverage, how much money will be used.

(This article is based on public reports and does not constitute any investment advice.