A recent research paper from the Bank of Italy has sent ripples through the crypto world, outlining a chilling scenario: a significant collapse in Ethereum's native cryptocurrency, ETH, could trigger a 'death spiral' that cripples the blockchain's ability to settle transactions. Such an event, the paper warns, could effectively freeze over $800 billion worth of assets, including stablecoins, tokenized stocks, and bonds that are increasingly finding a home on public ledgers.
Authored by Claudia Biancotti of the central bank's Directorate General for Information Technology, the report challenges a fundamental assumption in the burgeoning world of tokenized finance: that regulated assets issued on public blockchains are somehow insulated from the inherent volatility of the underlying cryptocurrency. The paper meticulously details how the reliability of a permissionless network's settlement layer, like Ethereum's, is deeply and inextricably linked to the market value of its foundational, unbacked token.
The Validator Economics Trap
At the heart of the Bank of Italy's argument lies a critical distinction between traditional financial market infrastructure and decentralized, permissionless blockchains. In conventional finance, settlement systems are typically run by heavily regulated entities. These institutions operate with strict oversight, capital requirements, and often the ultimate backstop of a central bank. Their operators are paid in stable fiat currency, ensuring trades are finalized legally and technically, regardless of market swings.
Ethereum, however, relies on a vast, decentralized network of 'validators.' These independent operators are crucial for verifying and finalizing transactions, but they aren't bound by legal mandates to serve the financial system. Their motivation is primarily profit. Validators incur tangible, real-world costs for their operations: expensive hardware, consistent internet connectivity, and robust cybersecurity measures. Crucially, their revenue, often referred to as 'staking yields,' is denominated predominantly in ETH.
The paper highlights a critical vulnerability: even if staking yields remain stable in token terms, a "substantial and persistent" drop in the dollar price of ETH could completely erase the real-world value of those earnings. If the revenue generated by validating transactions dips below the operational costs, rational operators face an undeniable choice: shut down their equipment.
This creates a potential "downward price spiral accompanied by persistent negative expectations." As profitability erodes, stakers might rush to sell their ETH holdings to mitigate further losses. Selling staked ETH requires 'unstaking,' a process that deactivates a validator. The report issues a stark warning about the extreme limit of this scenario: "no validators means that the network does not work anymore." In such a breakdown, the settlement layer would effectively cease to function, leaving users with transactions that are submitted but never processed. Consequently, assets residing on the chain would become "immovable," their fate sealed regardless of their inherent off-chain creditworthiness.
When Security Budgets Crumble
Beyond a mere halt in transaction processing, the Bank of Italy paper delves into an even more sinister threat: the drastically lowered cost for malicious actors to hijack the network during a price collapse. This vulnerability is framed through the concept of the "economic security budget," which is defined as the minimum investment needed to acquire enough stake to mount a sustained attack on the network.
On Ethereum, controlling more than 50% of the active validation power grants an attacker the ability to manipulate the consensus mechanism. This majority control would allow for devastating actions such as double-spending transactions or outright censorship of specific accounts and activities.
The paper estimates Ethereum's economic security budget, for example, stood at approximately 17 million ETH, or roughly $71 billion, around September 2025. Under normal market conditions, the author notes, this hefty price tag makes a successful attack "extremely unlikely." However, the security budget is far from static; it fluctuates directly with the token's market price. If ETH's price plummets, the dollar cost required to corrupt the network falls in lockstep. Simultaneously, as honest validators exit the market to stem their losses, the total pool of active stake shrinks, further lowering the threshold for an attacker to gain majority control.
This outlines a perverse inverse relationship: as the value of the network's native token approaches zero, the cost of attacking the infrastructure plummets. Yet, the incentive to attack may paradoxically increase due to the presence of other valuable assets that remain on the chain.
The Trap for 'Safe' Assets
This dangerous dynamic poses a particularly acute risk to the burgeoning category of 'real-world assets' (RWAs) and stablecoins that have proliferated on the Ethereum network. As of late 2025, Ethereum hosted more than 1.7 million assets with a staggering total capitalization exceeding $800 billion. This figure included roughly $140 billion in combined market capitalization for the two largest dollar-backed stablecoins.
In a catastrophic scenario where ETH has lost nearly all its value, the token itself would hold little interest for a sophisticated attacker. However, the underlying infrastructure would still house billions of dollars in tokenized treasury bills, corporate bonds, and fiat-backed stablecoins. The report argues these assets would become the primary targets. If an attacker gains control of the weakened chain, they could theoretically double-spend these tokens. This means sending them to an exchange to be sold for fiat currency while simultaneously sending them to a different wallet on-chain, effectively stealing the assets and introducing the shock directly into the traditional financial system.
If issuers, broker-dealers, or funds are legally obligated to redeem these tokenized assets at face value, but the on-chain ownership records are compromised or manipulated, the financial stress would transfer directly from the crypto market to real-world balance sheets. Considering this, the paper warns that the damage would not be confined to speculative crypto traders, "especially if issuers were legally bound to reimburse them at face value."
No Emergency Exit in Sight
In conventional financial crises, a common response to panic is a "flight to safety," where participants shift capital from distressed assets or venues to more stable ones. However, during a collapse of blockchain infrastructure, such a migration may prove impossible.
For an investor holding a tokenized asset on a failing Ethereum network, a flight to safety might mean moving that asset to another blockchain. Yet, significant obstacles stand in the way of this "switch in infrastructure":
- Cross-chain bridges vulnerability: These protocols, designed to move assets between blockchains, are notoriously vulnerable to hacks and may not be able to scale to handle a mass exodus during a panic. They could come under further attack, and rising uncertainty could lead to "weaker stablecoins" de-pegging from their intended value.
- Decentralized coordination difficulties: Unlike a centralized stock exchange that can halt trading to cool a panic, Ethereum is a global, decentralized system with often conflicting incentives, making rapid, coordinated action exceedingly difficult.
- Assets locked in DeFi: A substantial portion of assets, about $85 billion according to DeFiLlama data at the time of writing, is locked in DeFi protocols. Many of these act as automated asset managers with governance processes that cannot respond instantly or effectively to a settlement-layer failure.
Furthermore, the paper highlights the complete absence of a "lender of last resort" within the crypto ecosystem. While Ethereum possesses built-in mechanisms to throttle validator exits—capping processing to about 3,600 exits per day—these are purely technical safeguards, not economic backstops. The author also dismisses the idea that deep-pocketed actors like exchanges could stabilize a crashing ETH price through "massive buys," labeling it "very unlikely to work" in a true crisis of confidence where the market might actively attack the rescue fund itself.
A Pressing Regulatory Dilemma
Ultimately, the Bank of Italy paper frames this pervasive contagion risk as a critical policy question: Should permissionless blockchains be treated as critical financial market infrastructure? The author acknowledges that while some firms prefer permissioned blockchains run by authorized entities, the allure of public chains remains strong due to their unparalleled reach and interoperability.
The paper cites the BlackRock BUIDL fund, a tokenized money market fund available on both Ethereum and Solana, as a prime example of early-stage traditional finance activity leveraging public rails. However, the analysis suggests that importing this infrastructure comes with the unique and fundamental risk that the "health of the settlement layer is tied to the market price of a speculative token."
The paper concludes with a clear statement: central banks "cannot be expected" to prop up the price of privately issued native tokens merely to ensure the security of settlement infrastructure. Instead, it suggests that regulators may need to impose stringent business continuity requirements on issuers of backed assets.
The most concrete proposal in the document calls for issuers to maintain off-chain databases of ownership and to designate a pre-selected "contingency chain." This mechanism would theoretically allow for the porting of assets to a new network if the underlying Ethereum layer fails. Without such robust safeguards, the paper warns, the global financial system risks sleepwalking into a scenario where a crash in a speculative crypto asset could potentially halt the very plumbing of legitimate finance, with far-reaching consequences.
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