Bank of Italy Warns of Ethereum Infrastructure Collapse

• Economist Biancotti paper analyzes how an ETH price collapse could spread risk across crypto markets.
• Bank of Italy’s analysis recasts Ether not just as an investment, but as a vital piece of the Ethereum system’s inner workings.
• The bank also warns that such an event could disrupt digital financial assets even if those assets are usually considered low-risk.

The Bank of Italy has issued a striking warning of a big collapse in the price of Ethereum (the second-largest cryptocurrency). It could transform what many view as market risk into infrastructure and financial stability risk, potentially freezing more than $800 billion worth of assets that rely on the Ethereum network.

In a research paper called “What if Ether Goes to Zero? How Market Risk Becomes Infrastructure Risk in Crypto,” economist Claudia Biancotti examines a what-if scenario where the price of ETH plummets. She studies how such a crash could spread and destabilize the broader crypto financial ecosystem.

The Bank of Italy’s analysis recasts Ether not just as an investment, but as a vital piece of the Ethereum system’s inner workings, mainly because:

• Validators, the entities that secure Ethereum’s proof-of-stake network, earn rewards paid in ETH. If ETH’s price crashes, the real-world cash value of these payments might not cover their costs, which could lead them to shut down their operations.
• Fewer validators would reduce the total stake securing the network, lowering the blockchain’s security and increasing its vulnerability to attacks.
• If too many validators shut down, creating new blocks could slow or stop, preventing the Ethereum network from confirming transactions, which would leave assets on the blockchain stuck and untransferable.

Why Stablecoins and Bonds Are at Risk

The Bank of Italy warns that such an event could also disrupt digital financial assets (such as tokenized bonds, stocks, stablecoins, and other DeFi tokens) even if those assets are usually considered low-risk.

At the core of the warning is the strong link between the price of ETH, the earnings of the network’s validators, and the reliability of a blockchain that many use to settle financial transactions.

As per the report, Ethereum hosts a huge network of digital assets worth much more than ETH itself. These include widely used stablecoins like USDC and USDT for payments and trading, digitized versions of stocks, bonds, and other real-world assets, and DeFi platforms and funds locked in automated contracts.

Together, these assets are valued at over $800 billion. A collapse in ETH prices could cascade from weakened validator incentives to network instability, ultimately putting on-chain assets at risk of being locked in place.

Related: Bank of America Says Own Bitcoin, Markets Respond With Silence