Bank of Italy Modifies Ether Scenario to Zero in Ecosystem Stress Test

Bank of Italy Analyzes Ethereum Risks in Case of ETH Price Collapse

The Bank of Italy has modeled an extreme scenario in which the price of Ether drops to zero, illustrating how market risks associated with the native Ethereum token could morph into infrastructure and financial stability issues. A new study titled "What Would Happen If Ether Reached Zero? How Market Risks Become Infrastructure Risks in Cryptocurrencies" was conducted by Claudia Biancotti, an economist at the Bank of Italy, who examined the impact of an extreme price shock on financial services reliant on Ethereum for processing and settling transactions.

Biancotti emphasized the connection between the economic incentives of validators and the stability of the underlying blockchain used by stablecoins and other tokenized assets. The study investigates how validators, who are rewarded in ETH, might react if the token's price were to collapse, risking the loss of the value of their rewards. In this scenario, some validators might rationally choose to leave the network, which would decrease the overall security of the network, slow down block production, and weaken Ethereum's capacity to withstand certain attacks.

Biancotti asserts that Ethereum is increasingly used as a settlement layer for financial instruments, and shocks to the value of the native token could undermine the reliability of the underlying infrastructure. The study highlights that, under such stress conditions, disruptions would not be confined to speculative trading but could also impact payment and settlement use cases, which are increasingly scrutinized by regulatory authorities.

The Bank of Italy concluded that regulators face a challenging trade-off when considering the use of public chains in regulated financial infrastructure. It outlined two options: either treating today's public chains as unsuitable for use in regulated financial infrastructure due to their dependency on volatile native tokens, or allowing their use while imposing risk mitigation measures.