Ethereum’s Hidden Death Spiral Mechanic: A Threat to $800 Billion in Assets
An Ethereum price drop could have a devastating impact on the blockchain’s ability to process transactions, potentially freezing over $800 billion in assets, according to a research report by the Bank of Italy. The report, written by Claudia Biancotti of the Central Bank’s General Directorate of Information Technology, outlines a contagion scenario in which the fall in ETH’s price affects the blockchain’s security infrastructure to the point of failure.
The paper argues that the reliability of the settlement layer on permissionless networks like Ethereum is inextricably linked to the market value of an uncollateralized token. This challenges the assumption that regulated assets issued on public blockchains are insulated from the volatility of the underlying cryptocurrency.
The Validator Economic Trap
The report’s core argument rests on the fundamental difference between traditional financial market infrastructure and permissionless blockchains. In traditional finance, settlement systems are operated by regulated entities with formal oversight, capital requirements, and central bank backstops. In contrast, the Ethereum network relies on a decentralized workforce of “validators” who verify and complete transactions. However, these validators are not legally obliged to serve the financial system and are profit-oriented.
The paper notes that even if staking returns remain stable in symbolic terms, a “significant and sustained” decline in the dollar price of ETH could wipe out the real value of these returns. When the revenue generated from validating transactions falls below the cost of operating the devices, rational operators will close. This could lead to a “downward price spiral accompanied by persistent negative expectations” where investors rush to sell their holdings to avoid further losses.
Security Budgets and the Risk of Attack
The report warns that a price drop would dramatically reduce the cost for malicious actors to hijack the network. This vulnerability is framed by the concept of the “economic security budget” – defined as the minimum investment required to acquire enough shares to launch a sustained attack on the network. In Ethereum, controlling more than 50% of active validation power allows an attacker to manipulate the consensus mechanism, allowing double spending and the censorship of certain transactions.
The paper outlines a perverse inverse relationship: as the value of the network’s native token approaches zero, the cost of attacking the infrastructure decreases, but the incentive to attack may increase due to the presence of other valuable assets. At the end of 2025, Ethereum hosted more than 1.7 million assets with a total capitalization of over $800 billion, including the combined market capitalization of the two largest dollar-backed stablecoins of around $140 billion.
The Trap for “Safe” Assets
This dynamic poses particular risk to the “real-world” assets (RWAs) and stablecoins that have proliferated on the Ethereum network. In a scenario where ETH has lost almost all of its value, the token would be of little interest even to a sophisticated attacker. However, the infrastructure would still house billions of dollars of tokenized treasury bills, corporate bonds, and fiat-backed stablecoins. The report argues that these assets would become prime targets for attackers.
If an attacker gains control of the weakened chain, they could theoretically double spend these tokens by sending them to an exchange to sell for fiat while simultaneously sending them to another wallet on the chain. This brings the shock directly to the traditional financial system, causing financial stress to be transferred from the crypto market to real-world balance sheets.
No Emergency Exit
In traditional financial crises, panic often triggers a “flight to safety” in which those involved shift capital from distressed to stable trading venues. However, such a migration may be impossible during a blockchain infrastructure collapse. For an investor holding a tokenized asset on a failed Ethereum network, a flight to safety could mean moving that asset to another blockchain, but this presents significant obstacles.
According to data from DeFiLlama, there is approximately $85 billion locked in DeFi contracts, and many of these protocols act as automated asset managers with governance processes that cannot immediately respond to an outage at the settlement layer. The paper highlights the lack of a “lender of last resort” in the crypto ecosystem, making it unlikely that deep-pocketed players like exchanges could stabilize a plummeting ETH price through “massive buying”.
A Regulatory Dilemma
The Bank of Italy paper ultimately presents this risk of contagion as an urgent policy question: Should permissionless blockchains be treated as critical financial market infrastructure? The author notes that while some firms prefer permissioned blockchains operated by authorized entities, the appeal of public chains remains strong due to their reach and interoperability.
The paper concludes that central banks “cannot be expected” to support the price of privately issued native tokens simply to keep settlement infrastructure secure. Instead, it notes that regulators may need to impose strict business continuity requirements on issuers of collateralized assets. The most concrete proposal in the document calls for issuers to maintain off-chain ownership databases and establish a pre-selected “contingency chain” to allow assets to be ported to a new network if the underlying Ethereum layer fails.
Read the full report and learn more about the potential risks and implications of Ethereum’s hidden death spiral mechanic on Cryptoslate.
