Why ETH’s Unstaking Queue Has Suddenly Swelled
Overview
Beginning on July 16, ETH unstaking requests surged dramatically, with the validator exit queue climbing from just 1,920 to over 475,000 by July 22, pushing wait times from under an hour to more than eight days. While some increase in unstaking activity was expected following ETH’s recent price outperformance and changes to validator staking requirements from the recent ETH Pectra upgrade, the sharp spike was largely driven by a surge in ETH borrow rates that began on July 16. This spike in rates triggered a widespread unwind of ETH looping strategies, which in turn intensified de-pegging pressure on ETH-based liquid staking and restaking tokens (LSTs and LRTs).
Ethereum Staking Queue
Ethereum’s staking exit queue is a built-in mechanism designed to manage the orderly withdrawal of staked funds by validators from the network. To preserve network stability and prevent mass validator exits from jeopardizing consensus, Ethereum limits how many validators can exit during each epoch. This limit is known as the churn limit and it scales with the total number of active validators, allowing roughly 8 to 10 validators to exit per epoch (every ~6.4 minutes). When a validator initiates a voluntary exit, they enter the queue and must wait their turn to be processed. After exiting, there is a mandatory delay (around 27 hours) before funds become withdrawable. During periods of elevated exit demand, the queue can become severely backed up, creating waiting times that last days or even weeks.
This week is not the first time Ethereum has experienced unstaking backlogs. In January 2024, the queue had a wait time of six days as the failed crypto lender Celsius underwent a restructuring process requiring the withdrawal of 550,000 ETH.
ETH Looping Strategies Unwind as Borrow Rates Surge
Beginning on July 14, ETH borrow rates on the Aave DeFi protocol began to spike periodically. While borrow rates typically range from 2% to 3%, they surged as high as 18% on July 16, 18, and 21. 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 wallet withdrew more than 167,000 ETH beginning June 18. The sudden reduction in ETH on deposit created stresses for those running ETH looping strategies on Aave and also accounts for a portion of the surge in unstaking requests.
Looping is a widely used strategy among crypto traders aiming to amplify ETH staking yields. In its common form, users deposit a liquid staking token (LST) or liquid restaking token (LRT) as collateral on platforms like Aave and borrow ETH, which they then convert back into additional LSTs and redeposit, repeating the process to build leveraged exposure. The strategy is profitable when staking yields exceed ETH borrow rates, allowing users to earn the spread. It can be executed manually or through automated vaults offered by protocols such as EtherFi and Instadapp.
However, following the ETH supply crunch beginning July 16, the spread between staking yields and ETH borrow costs flipped negative. By July 21, it had fallen as low as -2.25%, rendering looping strategies unprofitable. This triggered a broad unwind as users began withdrawing their supplied ETH, repaying loans, and incrementally deleveraging their positions. Because many traders used LSTs or LRTs as collateral, they needed to either swap these assets back into ETH or unstake them. This added further stress to both the LST/LRT secondary markets and the Ethereum validator exit queue.
As borrow rates climbed, LSTs and LRTs began to further depeg from ETH. LSTs/LRTS normally trade at a slight discount to ETH to compensate for delays in redemptions due to Ethereum’s exit queue, limited liquidity on DEXs, and protocol-specific risks like slashing or smart contract exposure. In periods of forced deleveraging or redemptions, this selling pressure pushes LST/LRT prices further below par. Additionally, automated looping vaults respond differently to disruption. While some opt to unstake, others sell directly into secondary markets. For example, as of today EtherFi’s Liquid strategy has ~20,000 ETH in the Ethereum exit queue.
Further contributing to queue congestion, certain market participants began arbitraging the LST/LRT depeg. By purchasing discounted LSTs/LRTs on the secondary market and redeeming them via unstaking for full ETH value, they can capture the spread between the two. This compounded the number of ETH exit queue requests.
Entry Queue Demand Heats Up
The spike in unstaking requests is offset by a similar surge in new staking demand. Since June, ETH staking requests and the queue to become a validator have risen to levels last seen in April 2024.
This is driven by renewed enthusiasm over ETH the asset following its recent outperformance against bitcoin well as the launch of several digital asset treasury companies (DATCOs) that have purchased more than $2.5bn of ETH in recent months. For a full overview of the Ethereum corporate treasury landscape please refer to our recent report on the topic.
Outlook
While headline figures around unstaked ETH may initially suggest a wave of profit-taking, a closer look reveals that much of the activity has been driven by disruptions in the ETH lending market and the sharp rise in borrow rates that began on July 16. This is supported by the fact that new staking demand has remained robust, nearly offsetting the volume of ongoing withdrawals.
Despite the uptick in demand, ETH staking architecture operated as intended. While some may complain about the large increases in queue times, this is a feature, not a bug, of the network. It is intended to limit the rate at which validators can enter or exit, thereby protecting the stability and security of Ethereum's proof-of-stake consensus mechanism.
Nevertheless, this episode highlights the continued fragility of the ETH liquid staking and restaking ecosystem. These assets remain sensitive to leveraged strategies and prone to stress under extreme market conditions. The wide-ranging impact of LST/LRT depegging and redemption delays reinforces the importance of accounting for duration risk and liquidity bottlenecks.
Going forward, protocols that rely solely on Ethereum’s native exit mechanics may face increased scrutiny. We expect to see growing interest in solutions that improve redemption flexibility—such as peer-to-peer exit markets, improved LST/LRT AMMs, and protocol-native liquidity vaults designed to mitigate exit queue congestion and smooth capital flows.
Staking and restaking structures may be subject to regulatory oversight or interpretive guidance in certain jurisdictions, particularly where they intersect with collective investment or securities frameworks. Readers should assess any applicable regulatory obligations in their respective jurisdictions.
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