Ethereum’s staking system is facing increasing pressure as validator withdrawals reach unprecedented levels, challenging the equilibrium between liquidity and security.
Recent validator data indicates that over 2.44 million ETH, worth more than $10.5 billion, are currently awaiting withdrawal as of Oct. 8, marking the third-highest backlog in a month.
This backlog is second only to the peaks of 2.6 million ETH on Sept. 11 and 2.48 million ETH on Oct. 5.
According to Dune Analytics data compiled by Hildobby, most withdrawals are coming from major liquid staking token (LST) platforms such as Lido, EtherFi, Coinbase, and Kiln. These platforms allow users to stake ETH while retaining liquidity via derivative tokens like stETH.
Consequently, ETH stakers are now encountering average withdrawal wait times of 42 days and 9 hours, illustrating an ongoing imbalance first flagged by CryptoSlate in July.
Ethereum co-founder Vitalik Buterin notably defended the withdrawal structure as a deliberate safety measure.
He likened staking to a disciplined commitment to the network, suggesting that delayed exits bolster stability by discouraging short-term speculation and ensuring validators remain dedicated to the chain’s long-term security.
What are the implications for Ethereum and its ecosystem?
The extended withdrawal queue has ignited discussions in the Ethereum community, raising fears it could pose a systemic risk to the blockchain network.
Pseudonymous ecosystem analyst Robdog described the circumstance as a potential “time bomb,” emphasizing that longer exit periods heighten duration risk for participants in liquid staking markets.
He commented:
“The issue is that this could initiate a damaging unwinding loop with significant systemic effects on DeFi, lending markets, and the utilization of LSTs as collateral.”
Per Robdog, the length of the withdrawal queue impacts the liquidity and price stability of tokens like stETH and other liquid staking derivatives, which usually trade at slight discounts to ETH due to redemption delays and protocol risks. As validator queues extend, these discounts may worsen.
For example, when stETH trades at 0.99 ETH, traders can achieve approximately 8% yearly returns by purchasing the token and waiting 45 days for redemption. However, if the waiting period increases to 90 days, their purchasing incentive diminishes to around 4%, which could further amplify the peg gap.
Moreover, since stETH and other liquid staking tokens serve as collateral across DeFi platforms like Aave, any significant price deviation from ETH could have widespread repercussions for the ecosystem. For context, Lido’s stETH alone supports approximately $13 billion in total value locked, a large portion of which is tied to leveraged looping positions.
Robdog warned that a sudden liquidity crisis, such as a massive deleveraging episode, could prompt swift unwinds, driving up borrowing rates and destabilizing DeFi markets.
He stated:
“If, for instance, the market conditions change rapidly, leading many ETH holders to wish to exit their positions (e.g., akin to another Terra/Luna or FTX incident), there will be a substantial withdrawal of ETH. However, only a limited quantity can be removed since most is lent out. This situation could lead to a ‘run on the bank.’”
In light of this, the analyst emphasized the need for strengthened risk management practices in vaults and lending markets to address increasing duration exposure.
He suggested:
“If the exit period for an asset extends from 1 day to 45, it ceases to be the same asset.”
He also urged developers to consider discount rates related to duration when evaluating collateral.
Rondog mentioned:
“Given that LSTs are fundamentally essential and systemic to DeFi, we should contemplate enhancing the throughput of the exit queue. Even a 100% increase in throughput would provide sufficient stake to secure the network.”
