Ethereum’s hidden ‘death spiral’ mechanic could freeze $800 billion in assets regardless of their safety rating

An Ethereum value collapse could break the blockchain’s capacity to settle transactions and freeze over $800 billion in assets, a Bank of Italy analysis paper warns.

The paper, authored by Claudia Biancotti of the central financial institution’s Directorate General for Information Technology, outlined a contagion situation the place ETH’s value collapse degrades the blockchain’s safety infrastructure to the purpose of failure.

Such a breakdown, the report argues, would lure and compromise tokenized shares, bonds, and stablecoins that main monetary establishments are more and more putting on public ledgers.

Essentially, the paper challenges the belief that regulated assets issued on public blockchains are insulated from the volatility of the underlying cryptocurrency.

According to the report, the reliability of the settlement layer in permissionless networks like Ethereum is inextricably tied to the market worth of an unbacked token.

The validator economics lure

The paper’s core argument rests on the elemental distinction between conventional monetary market infrastructure and permissionless blockchains.

In conventional finance, settlement techniques are operated by regulated entities with formal oversight, capital necessities, and central financial institution backstops. These entities are paid in fiat foreign money to make sure trades are finalized legally and technically.

In distinction, the Ethereum community depends on a decentralized workforce of “validators”. These are impartial operators who confirm and finalize transactions.

However, they don’t seem to be legally mandated to serve the monetary system. So, they’re motivated by revenue.

Validators incur real-world prices for {hardware}, web connectivity, and cybersecurity. Yet, their income is denominated primarily in ETH.

The paper notes that even when staking yields stay steady in token phrases, a “substantial and protracted” drop in the dollar price of ETH could obliterate the real-world worth of these earnings.

If the income generated by validating transactions falls beneath the price of working the gear, rational operators will shut down.

The paper describes a possible “downward value spiral accompanied by persistent detrimental expectations,” the place stakers rush to promote their holdings to keep away from additional losses.

Selling staked ETH requires “unstaking,” which successfully deactivates a validator. The report warns that in an excessive restrict situation, “no validators signifies that the community doesn’t work anymore.”

Under these situations, the settlement layer would successfully stop to perform, leaving customers in a position to submit transactions which can be by no means processed. So, assets residing on the chain would turn out to be “immovable,” regardless of their off-chain creditworthiness.

When safety budgets break

Meanwhile, this menace extends past a easy halt in processing. The paper argues {that a} value collapse would drastically decrease the price for malicious actors to hijack the community.

This vulnerability is framed by the idea of the “financial safety funds”— outlined because the minimal funding required to amass sufficient stake to mount a sustained assault on the community.

On Ethereum, controlling greater than 50% of the energetic validation energy allows an attacker to control the consensus mechanism. This scenario would allow double-spending and the censorship of particular transactions.

As of September 2025, the paper estimates Ethereum’s economic security budget was roughly 17 million ETH, or roughly $71 billion. Under regular market situations, the creator notes, this high price makes an assault “extraordinarily unlikely.”

However, the safety funds will not be static; it fluctuates with the token’s market value. If ETH’s value collapses, the greenback price to deprave the community falls in tandem.

Simultaneously, as sincere validators exit the market to chop losses, the whole pool of energetic stake shrinks, additional decreasing the edge for an attacker to realize majority management.

The paper outlines a perverse inverse relationship: As the worth of the community’s native token approaches zero, the price of attacking the infrastructure plummets, but the inducement to assault it might improve as a result of presence of different invaluable assets.

The lure for ‘secure’ assets

This dynamic poses a selected threat to the “real-world” assets (RWAs) and stablecoins which have proliferated on the Ethereum community.

As of late 2025, Ethereum hosted greater than 1.7 million assets with a complete capitalization exceeding $800 billion. This determine included roughly $140 billion in combined market capitalization for the two largest dollar-backed stablecoins.

In a situation the place ETH has misplaced almost all its worth, the token itself could be of little curiosity to a classy attacker.

However, the infrastructure would nonetheless home billions of {dollars} in tokenized treasury payments, company bonds, and fiat-backed stablecoins.

The report argues these assets would turn out to be the first targets. If an attacker good points management of the weakened chain, they could theoretically double-spend these tokens by sending them to an change to be offered for fiat whereas concurrently sending them to a distinct pockets on-chain.

This brings the shock instantly into the traditional financial system.

If issuers, broker-dealers, or funds are legally certain to redeem these tokenized assets at face worth, however the on-chain possession information are compromised or manipulated, the monetary stress transfers from the crypto market to real-world stability sheets.

Considering this, the paper warns that the harm wouldn’t be confined to speculative crypto merchants, “particularly if issuers had been legally certain to reimburse them at face worth.”

No emergency exit

In typical monetary crises, panic typically triggers a “flight to safety,” in which members shift capital from distressed to steady venues. However, such a migration could also be unimaginable throughout a collapse of blockchain infrastructure.

For an investor holding a tokenized asset on a failing Ethereum community, a flight to safety could imply transferring that asset to a different blockchain. Yet, that presents important obstacles to this “change in infrastructure.”

First, cross-chain bridges, that are protocols used to maneuver assets between blockchains, are notoriously vulnerable to hacks and should not scale to deal with a mass exodus throughout a panic.

These bridges could come underneath assault, and additional rising uncertainty could trigger assets to be “speculated in opposition to,” probably inflicting “weaker stablecoins” to de-peg.

Second, the ecosystem’s decentralized nature makes coordination tough. Unlike a centralized inventory change that may halt buying and selling to chill a panic, Ethereum is a global system with conflicting incentives.

Third, a good portion of assets could also be trapped in DeFi protocols.

According to DeFiLlama knowledge, about $85 billion is locked in DeFi contracts on the time of writing, and lots of of these protocols act as automated asset managers with governance processes that can’t reply immediately to a settlement-layer failure.

Furthermore, the paper highlights the dearth of a “lender of final resort” in the crypto ecosystem.

While Ethereum has built-in mechanisms to gradual the velocity of validator exits — capping processing to about 3,600 exits per day — these are technical throttles, not financial backstops.

The creator additionally dismissed the concept that deep-pocketed actors like exchanges could stabilize a crashing ETH value by “huge buys,” calling it “most unlikely to work” in a real disaster of confidence the place the market may assault the rescue fund itself.

A regulatory dilemma

The Bank of Italy paper in the end frames this contagion threat as a urgent coverage query: Should permissionless blockchains be handled as vital monetary market infrastructure?

The creator notes that whereas some companies choose permissioned blockchains run by approved entities, the attract of public chains stays sturdy as a result of their attain and interoperability.

The paper cites the BlackRock BUIDL fund, a tokenized cash market fund obtainable on Ethereum and Solana, as a primary instance of early-stage conventional finance exercise on public rails.

However, the evaluation means that importing this infrastructure comes with the distinctive threat that the “well being of the settlement layer is tied to the market value of a speculative token.”

The paper concludes that central banks “can’t be anticipated” to prop up the worth of privately issued native tokens merely to maintain the settlement infrastructure safe. Instead, it means that regulators might must impose strict enterprise continuity necessities on issuers of backed assets.

The most concrete proposal in the doc requires issuers to take care of off-chain databases of possession and to designate a pre-selected “contingency chain.” This would theoretically enable porting assets to a brand new community if the underlying Ethereum layer fails.

Without such safeguards, the paper warns, the monetary system dangers sleepwalking right into a situation the place a crash in a speculative crypto asset halts the plumbing of reputable finance.

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