Ethereum’s validator exit queue has swelled dramatically since July 16.
According to Galaxy Digital, this was driven less by speculative profit-taking and more by structural stresses triggered by spiking ETH borrow rates and the unwinding of leveraged staking strategies.
Ethereum’s Exit Queue Chaos
Beginning mid-July, ETH borrow rates on Aave surged from a stable 2-3% to as high as 18% on July 16, 18, and 21 after a liquidity crunch sparked by large ETH withdrawals from a wallet linked to HTX exchange. This sudden hike flipped the spread between ether staking yields and borrow rates negative, which left popular ETH looping strategies unprofitable almost overnight.
Galaxy Digital explained that these looping strategies involve depositing Liquid Staking Tokens (LSTs) or Liquid Restaking Tokens (LRTs) as collateral and borrowing ETH against them. Traders then use the borrowed ETH to purchase more LSTs or LRTs and re-deposit them to amplify yield as long as staking APR exceeds borrow costs.
Once the spread turned negative, participants were forced to unwind, repaying loans and reclaiming ETH collateral. This, in turn, intensified selling pressure on LSTs/LRTs in secondary markets and pushed their discounts to ETH wider. In a bid to deleverage, many traders either swapped LSTs/LRTs for ETH at a discount or initiated unstaking to redeem them at par, which flooded Ethereum’s exit queue.
Ethereum’s exit queue is intentionally throttled to protect consensus stability. Only 8-10 validators are allowed to exit per epoch. When exit demand spikes, wait times escalate rapidly. By July 22, the queue ballooned from under 2,000 validators to over 475,000, which pushed wait times from under an hour to more than eight days.
This week’s surge is similar but exceeds previous episodes, such as the Celsius-driven withdrawals in January 2024. Moreover, the pressure on LST and LRT markets led some participants to purchase these tokens at a discount and redeem them for their full ETH value, adding to the exit queue congestion.
Although the sharp increase in unstaking requests might suggest widespread exits and bearish sentiment, Galaxy Digital pointed out that new ETH staking demand has stayed strong. In fact, validator entry queues rose to their highest levels since April 2024, almost balancing out the withdrawal volumes.
Structural Fragility
The Ethereum staking architecture, by design, absorbed the liquidity shock and operated precisely as intended to preserve network security amid mass exits. However, the episode highlighted the liquidity “fragility” of LST/LRT ecosystems under extreme market conditions, particularly when reliant on leveraged strategies.
This event also underscored the urgency of developing solutions that mitigate duration and redemption risks, such as P2P exit markets and protocol-native liquidity vaults that can ease capital flows during exit spikes.
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