Market Risk Becomes Infrastructure (Settlement/Cyber) Risk in Crypto

Abstract

Permissionless blockchains, the most common type of settlement infrastructure in crypto, attract increasing attention from the traditional financial sector. Adoption may offer cost and speed advantages vis-à-vis legacy solutions. There is, however, an oft-overlooked, tight link between volatile crypto prices and infrastructure availability and security. Most permissionless blockchains are operated by a decentralized set of independent validators, compensated in unbacked cryptoassets known as native tokens. Should such tokens incur a substantial and persistent loss in market value, validators might leave. Transaction settlement could slow down or halt entirely, and the infrastructure’s exposure to cyber attacks would increase.