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

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

The paper, authored by Claudia Biancotti of the central bank’s Directorate General for Information Technology, outlined a contagion scenario where ETH's price collapse degrades the blockchain’s security infrastructure to the point of failure.

Such a breakdown, the report argues, would trap and compromise tokenized stocks, bonds, and stablecoins that major financial institutions are increasingly placing on public ledgers.

Essentially, the paper challenges the assumption 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 value of an unbacked token.

The validator economics trap

The paper'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. These entities are paid in fiat currency to ensure trades are finalized legally and technically.

In contrast, the Ethereum network relies on a decentralized workforce of “validators”. These are independent operators who verify and finalize transactions.

However, they are not legally mandated to serve the financial system. So, they are motivated by profit.

Validators incur real-world costs for hardware, internet connectivity, and cybersecurity. Yet, their revenue is denominated primarily in ETH.

The paper notes that even if staking yields remain stable in token terms, a “substantial and persistent” drop in the dollar price of ETH could obliterate the real-world value of those earnings.

If the revenue generated by validating transactions falls below the cost of running the equipment, rational operators will shut down.

The paper describes a potential “downward price spiral accompanied by persistent negative expectations,” where stakers rush to sell their holdings to avoid further losses.

Selling staked ETH requires “unstaking,” which effectively deactivates a validator. The report warns that in an extreme limit scenario, “no validators means that the network does not work anymore.”

Under these conditions, the settlement layer would effectively cease to function, leaving users able to submit transactions that are never processed. So, assets residing on the chain would become “immovable,” regardless of their off-chain creditworthiness.

When security budgets break

Meanwhile, this threat extends beyond a simple halt in processing. The paper argues that a price collapse would drastically lower the cost for malicious actors to hijack the network.

This vulnerability is framed through the concept of the “economic security budget”— defined as the minimum investment required to acquire enough stake to mount a sustained attack on the network.

On Ethereum, controlling more than 50% of the active validation power enables an attacker to manipulate the consensus mechanism. This situation would enable double-spending and the censorship of specific transactions.

As of September 2025, the paper estimates Ethereum’s economic security budget was approximately 17 million ETH, or roughly $71 billion. Under normal market conditions, the author notes, this high cost makes an attack “extremely unlikely.”

However, the security budget is not static; it fluctuates with the token's market price. If ETH’s price collapses, the dollar cost to corrupt the network falls in tandem.

Simultaneously, as honest validators exit the market to cut losses, the total pool of active stake shrinks, further lowering the threshold for an attacker to gain majority control.

The paper 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 it may increase due to the presence of other valuable assets.

The trap for ‘safe’ assets

This dynamic poses a specific risk to the “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 total capitalization exceeding $800 billion. This figure included roughly $140 billion in combined market capitalization for the two largest dollar-backed stablecoins.

In a scenario where ETH has lost nearly all its value, the token itself would be of little interest to a sophisticated attacker.

However, the 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 by sending them to an exchange to be sold for fiat while simultaneously sending them to a different wallet on-chain.

This brings the shock directly into the traditional financial system.

If issuers, broker-dealers, or funds are legally bound to redeem these tokenized assets at face value, but the on-chain ownership records are compromised or manipulated, the financial stress transfers 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 conventional financial crises, panic often triggers a “flight to safety,” in which participants shift capital from distressed to stable venues. However, such a migration may be impossible during a collapse of blockchain infrastructure.

For an investor holding a tokenized asset on a failing Ethereum network, a flight to safety could mean moving that asset to another blockchain. Yet, that presents significant obstacles to this “switch in infrastructure.”

First, cross-chain bridges, which are protocols used to move assets between blockchains, are notoriously vulnerable to hacks and may not scale to handle a mass exodus during a panic.

These bridges could come under attack, and further rising uncertainty could cause assets to be “speculated against,” potentially causing “weaker stablecoins” to de-peg.

Second, the ecosystem's decentralized nature makes coordination difficult. Unlike a centralized stock exchange that can halt trading to cool a panic, Ethereum is a global system with conflicting incentives.

Third, a significant portion of assets may be trapped in DeFi protocols.

According to DeFiLlama data, about $85 billion is locked in DeFi contracts at the time of writing, and many of these protocols act as automated asset managers with governance processes that cannot respond instantly to a settlement-layer failure.

Furthermore, the paper highlights the lack of a “lender of last resort” in the crypto ecosystem.

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

The author also dismissed the idea that deep-pocketed actors like exchanges could stabilize a crashing ETH price through “massive buys,” calling it “very unlikely to work” in a true crisis of confidence where the market might attack the rescue fund itself.

A regulatory dilemma

The Bank of Italy paper ultimately frames this contagion risk as a pressing policy question: Should permissionless blockchains be treated as critical financial market infrastructure?

The author notes that while some firms prefer permissioned blockchains run by authorized entities, the allure of public chains remains strong due to their reach and interoperability.

The paper cites the BlackRock BUIDL fund, a tokenized money market fund available on Ethereum and Solana, as a prime example of early-stage traditional finance activity on public rails.

However, the analysis suggests that importing this infrastructure comes with the unique risk that the “health of the settlement layer is tied to the market price of a speculative token.”

The paper concludes that central banks “cannot be expected” to prop up the price of privately issued native tokens simply to keep the settlement infrastructure secure. Instead, it suggests that regulators may need to impose strict 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 would theoretically allow porting assets to a new network if the underlying Ethereum layer fails.

Without such safeguards, the paper warns, the financial system risks sleepwalking into a scenario where a crash in a speculative crypto asset halts the plumbing of legitimate finance.

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