Could Ethereum Collapse Under a Price Crash?

The Bank of Italy has published an article about a potential infrastructure risk affecting Ethereum. The paper focuses specifically on Ethereum, but the vulnerability it describes could, in principle, apply to other blockchains as well.

The author models a scenario in which the price of ETH starts to fall sharply, regardless of the underlying reasons. In such a situation, validators might decide that earning rewards in a rapidly depreciating asset is no longer attractive. Some of them could choose to exit staking and sell their coins. This, in turn, could trigger a cascading effect. If enough validators stop securing the network, the risk of a 51% attack (or, more accurately for most PoS networks, a "67% attack") would rise significantly. Such an outcome could have extremely negative consequences for all projects built on top of the Ethereum blockchain.

That said, there are a few important points worth emphasizing.

In many PoS networks, including Ethereum, a substantial share of the total token supply is held by developers and early investors. These coins were acquired either for free or at a very low cost. As a result, even in the event of a severe price decline, these holders would still remain in profit.

Moreover, if we imagine a situation where all independently operated validators exit staking and only the developers' own coins remain, it is hard to see what incentive the developers would have to deliberately destroy their own project via a 51% (or 67%) attack. Once staking ceases to be economically attractive, the validator set would naturally shrink to a smaller group of enthusiasts who genuinely care about the long-term future of the network.

For these reasons, I consider the scenario described in the article to be highly unlikely. Many cryptocurrencies have already gone through price drawdowns of 90% or more, yet this has not led to the kinds of failures the author warns about.

Such attacks are more characteristic of PoW networks. There, a falling price often leads to miners shutting down their equipment, and this reduction in hash power can make the network vulnerable. In those cases, attackers really can disrupt operations and rewrite blocks. There are plenty of real-world examples: Ethereum Classic, Bitcoin Gold, Verge, Horizen, Bitcoin SV, and others.

In this respect, Ethereum appears to be better protected.