Ethereum Unstaking Queue Surpasses 475K Validators, Pegs Under Stress Due to LST Leverage Unwind
ETH’s “validator exit queue” surged past 475,000 validators this week, pushing the unstaking wait time to an unprecedented nine days – the network’s second-longest on record since the Merge.
This sharp spike has been attributed by Galaxy Digital Research to a cascading unwind of leveraged positions using liquid staking tokens (LSTs). The analysis points to a specific trigger: “This volatility was driven by a sharp reduction in ETH supply on Aave, initiated by large withdrawals from the platform by a wallet tagged to the HTX exchange.”
The withdrawal surge sent Aave’s ETH borrow rates skyrocketing from approximately 3% to over 18%. According to the report, this rate increase rendered leveraged stETH positions unprofitable once rates surpassed 10%, prompting a mass sell-off.
The unwinding impacted stETH holders through two main channels. Some liquid stETH users (those who recursively borrow ETH to buy more stETH) sold stETH directly into automated market makers (AMMs), causing the stETH/ETH peg to drop by 30-60 basis points. Others attempted to redeem via withdrawals (validating), contributing to the massive queue buildup. Although May’s Pectra upgrade lifted the fixed churn cap, allowing up to roughly 12 exits per epoch, the sheer volume overwhelmed even this higher rate.
The persistent nine-day wait created a feedback loop. Arbitrageurs calculated that locking up depegged stETH offered new, yield-generating arbitrage opportunities. Cork Protocol’s Robdog.eth described the annualized yield of a specific trade (buying stETH at a discount and redeeming later) as 25%, noting profitability and projecting arbitrage take rates could reach 100-110 basis points if the wait extended further.
Crucially, the incident did not cause an ETH spot crash. Daily inflows into ETH spot Exchange-Traded Funds remained robust, roughly $300-600 million over the past week, helping absorb much of the selling pressure.
“Investor appetite for the two biggest blockchains is undeniable. ETH is outperforming the original blockchain so far this month.” – Dom Harz, Co-founder of hybrid L2 BOB
Speculation exists regarding a potential link to overall ETH scarcity felt by some OTC desks amid rising ETF demand. However, Galaxy Research, citing on-chain flows, considers leveraged stETH loop unwinds the primary driver, with OTC redemption potentially playing a secondary or marginal role.
Despite the overall ETH price stability, the episode highlights systemic vulnerabilities. The stETH/ETH peg stabilized slightly around 0.995, yet the on-chain AMM liquidity for stETH is estimated to have dropped significantly from $280 million to as low as $180 million. Major lending platforms often rely on stETH’s redemption oracle, not market price, for liquidation checks.
Galaxy Research issued a warning about the fragility of the ecosystem: “This episode highlights the continued fragility of the ETH liquid staking and restaking ecosystem.” Proposed solutions include peer-to-peer exit markets, rate smoothing mechanisms, and fixed-term vaults intended to reduce dependence on the voluntary redemption queue.
Liquidity providers in the loop face a distinct trilemma, as an analyst put it: Accept a moderate 5-6% loss by selling quickly; wait nine-plus days holding stETH while paying high interest; or hold and risk further deleveraging if peg recovery stalls.
In conclusion, the significant unstaking queue and peg deviation underscore ongoing challenges in Ethereum’s liquid staking infrastructure, demanding more resilient design.
Source: Blockworks Research
