Ethereum validators are now lining up to exit the beacon chain, defying expectations that Ethereum’s consensus layer would steadily absorb Ether’s supply.
According to data from Validator Queue, 648 entities are waiting to offboard the network equating to a more than five-hour delay on withdrawals. Conversely, there is zero wait time for validators seeking to onboard the network, suggesting demand for native Ethereum staking is waning seven months after the activation of Ethereum’s Shanghai upgrade.
Shanghai enabled native Ethereum stakers to withdraw their assets from the Beacon Chain — Ethereum’s consensus layer — for the first time since Ethereum staking first launched in December 2020.
Ethereum’s growing exit queue comes in spite of predictions that the Beacon Chain would steadily absorb the supply of staked Ether.
In May, one month after Shanghai’s activation, the waitlist to exit the Beacon Chain had cleared after an initial spate of withdrawals. Deposits had surged by 500%, with the high demand for staking yields already offsetting withdrawals. Analysis suggested the majority of withdrawals comprised accumulated staking rewards, with few validators pulling their principal from the network.
However, the waitlists for validators both seeking to onboard or exit the network had completely cleared come mid-October, signaling demand from new stakers had slowed. The number of stakers waiting to exit the network overtook the onboarding queue for the first time on Oct. 23, despite the number of Ethereum validators continuing to rise over the past month.
While Ethereum’s staking dominance has also kept growing to post a record high of 23.45% of Ether’s supply on Nov. 19, the rate of acceleration slowed appreciably over the past month.
With staked Ether’s dominance continuing to grow despite demand from new validators falling, the data suggests some stakers may be abandoning native staking in favor of holding liquid staking tokens.
Fears of supply shock overblown?
The trend contradicts expectations that demand for Ethereum staking could result in poor on-chain liquidity as users deposit an ever-increasing share of Ether onto the Beacon Chain.
An Ethereum Improvement Proposal co-authored by Tim Beiko and Dapplion of the Ethereum Foundation in September projected that half of Ether’s supply could be staked by May 2024 should Ethereum maintain a deposit queue, adding that Ethereum’s entire supply could be locked up by 2025.
The proposal, EIP-7514, recommends limiting the rate that new validators can come online at eight per epoch (every 6.4 minutes). The proposal is currently undergoing peer review, with some analysts tipping that EIP-7514 could be included in Ethereum’s forthcoming Dencun upgrade.
Last week, Pentoshi of Merit Circle similarly warned their 714,800 followers that Ether could face a supply crisis as demand for ETH staking and Ethereum’s burn mechanism consistently removes coins from active circulation.