The hidden "death spiral" mechanism of Ethereum could freeze $800 billion

A research report from the Bank of Italy warns that a sharp decline in ETH prices could break the blockchain’s transaction processing capacity and freeze over $800 billion in assets.

The report, conducted by Claudia Biancotti of the bank’s Information Technology Department, describes a risk propagation scenario in which a drop in ETH value weakens the blockchain’s security infrastructure to the point of failure.

According to the report, this incident would “trap” and harm tokenized stocks, bonds, and stablecoins, which are increasingly being recorded on public ledgers by major financial institutions. The report challenges the assumption that assets managed on public blockchains can be “immune” to the volatility of underlying cryptocurrencies.

The study indicates that the reliability of the payment layer in decentralized networks like Ethereum is closely tied to the market value of the uncollateralized token.

Validator’s Economic Trap

The core point of the report is the fundamental difference between traditional financial market infrastructure and decentralized blockchain.

In traditional finance, payment systems are operated by regulated, supervised organizations that require capital backing from central banks. They are paid in fiat currency to ensure transactions are legally and technically completed.

In contrast, the Ethereum network relies on a decentralized force of “validators,” independent operators who verify and complete transactions. They are not legally bound to serve the financial system but are primarily driven by profit.

Validators must pay actual costs for hardware, internet, and cybersecurity, while their revenue is mainly in ETH. The report notes that even if staking yields remain stable in tokens, a “sharp and prolonged” decline in ETH’s USD price could wipe out the real value of this income.

If transaction validation revenue falls below operational costs, rational validators will shut down the system. A downward price spiral combined with prolonged negative expectations could lead them to sell off staked ETH, resulting in validator deactivation and the network shutting down entirely. In this case, the payment layer would cease to operate, causing transactions to halt and assets on the blockchain to become “frozen.”

When Security Budget Is Breached

The danger is not just transaction congestion. The report argues that a collapse in ETH prices would significantly reduce the cost for malicious actors to take control of the network.

The concept of “economic security budget” is defined as the minimum investment needed to control enough stake to attack the network. On Ethereum, controlling over 50% of the validation power allows an attacker to manipulate the consensus mechanism, double-spend, and censor transactions.

By September 2025, the report estimates Ethereum’s security budget at around 17 million ETH (~$71 billion). Under normal market conditions, this high cost makes an attack “very unlikely.” However, a decline in ETH price would lower the attack cost, while legitimate validators retreat, reducing total stake and creating conditions for attackers to gain majority control.

Risks to “Safe” Assets

This mechanism is especially dangerous for real-world assets (RWAs) and stablecoins on Ethereum. By the end of 2025, Ethereum will store over 1.7 million assets with a total market cap exceeding $800 billion, including about $140 billion in two major USD-backed stablecoins.

When ETH loses nearly all its value, the token becomes less attractive to attackers, but the infrastructure still holds billions of USD in government bonds, corporate bonds, and stablecoins. Malicious actors could seize control of the network and double-spend these assets, selling on exchanges for fiat and transferring to other on-chain wallets, thereby introducing systemic risk into traditional finance. If issuers or funds are legally required to reimburse tokenized assets, financial stress could spill over from the crypto market into real-world balance sheets.

No Emergency Exit

In traditional financial crises, investors often seek a “safe haven” to move their capital. In the event of Ethereum’s collapse, transferring assets to another network faces many obstacles.

• Cross-chain bridges are vulnerable to hacks and difficult to scale for mass migration.
• The decentralized nature makes coordination difficult, unlike centralized exchanges that can halt trading.
• About $85 billion in assets locked in DeFi cannot respond immediately to the payment layer failure.

The ecosystem also lacks a “lender of last resort” to save the network. The validator withdrawal limit mechanism is technical, not economic support. The report further suggests that large organizations buying ETH to rescue it “are unlikely to succeed” during a crisis of confidence.

Policy Dilemmas

The report raises the question: Should permissionless blockchains be considered critical financial market infrastructure?

While some companies prioritize regulated blockchains, public blockchains remain attractive due to accessibility and interoperability. Deploying traditional assets on public blockchains, such as BlackRock’s tokenized money market fund on Ethereum and Solana, carries risks: “the health of the payment layer depends on the price of speculative tokens.”

The report concludes that central banks “cannot expect” to rescue private tokens solely to protect infrastructure. Instead, regulators could require issuers to maintain off-chain ownership data and prepare a “backup chain” to transfer assets if the Ethereum layer collapses. Without these measures, the financial system risks paralysis from the collapse of a single speculative crypto asset.