ETH redemptions hit record highs: Understanding the Ethereum unstaking and withdrawal queue

Ethereum staking has long been the ultimate "set it and forget it" cryptocurrency exchange. Simply stake ETH, secure the network, and enjoy passive income! With the recent surge in ETH prices, crypto Twitter has been abuzz with record-breaking withdrawal wait times exceeding two weeks. But what exactly is the withdrawal queue? How does it work? And why is there such a sudden surge of interest in this obscure aspect of Ethereum's architecture? Let's find out. 1. What is the Withdrawal Queue? The successful implementation of the Ethereum merge in September 2022 marked the completion of Ethereum's transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS)—an upgrade that officially transferred control of network security to stakers. Under Ethereum's PoS mechanism, all stakers must deposit at least 32 ETH as a security deposit, which grants them the right to store network data, process transactions, and add blocks to the chain. Stakers are rewarded in ETH for maintaining network security. ETH staking was initially a one-way, deposit-only commitment mechanism, but the Shapella upgrade in April 2023 enabled stakers to withdraw ETH from their stakes. To ensure network security and prevent unexpected downtime, the Ethereum network enforces a "withdrawal queue" for all stakers who wish to withdraw ETH from validators. 2. How does the withdrawal queue work? The withdrawal queue supports both partial withdrawals (withdrawing only accumulated validator rewards and retaining them in the validator set) and full withdrawals (withdrawing all ETH rewards and staked ETH and exiting the validator set). The system processes withdrawal requests using a round-robin mechanism, processing up to 16 partial or full withdrawal combinations per block. Processing begins with the oldest validator, progresses to the most recently established, and then repeats the cycle. Currently, this mechanism takes approximately nine days to complete a full "sweep" of the entire active validator set. If the account's ETH balance exceeds the node's deposit, partial withdrawal requests will automatically enter the withdrawal queue. However, for full withdrawals, stakers must first undergo an additional exit queue review. Although the exit queue capacity dynamically adjusts with the number of active validators, its throughput is far lower than the withdrawal queue itself. Ethereum's Electra upgrade caps the exit queue at 256 ETH per epoch (32 blocks), effectively limiting the processing of full withdrawal requests per epoch to a maximum of 8 full nodes. 3. Why is the withdrawal queue so important? The impact of queue congestion goes far beyond simply adding days to withdrawals for "independent stakers." Liquid staked ETH is a cornerstone of Ethereum's capital markets. These tokens, combining passive ETH yield with transferable certificates of deposit, have become the primary fuel source for the DeFi economy and the lifeblood of on-chain leverage. When someone wants to sell a liquid staked ETH token (such as Lido's stETH), their order can be traded through the ETH unstacking process or on the spot market. While unstacking requests can be processed in as little as a day (especially for large staking operators like Lido and Coinbase, which have a large number of validators dispersed across their networks), wait times in the exit queue alone are exceeding 16 days due to the current record number of validators scrambling to exit. In financial markets, time is money. With staking withdrawals now taking over two weeks to process, parties providing liquidity for Liquidity Staking Tokens (LST), such as market makers, are beginning to demand larger discounts. Ideally, Liquidity Staking ETH tokens would be redeemable 1:1 for the amount of ETH they represent. However, when withdrawal queues imposed substantial wait times for validators to fully exit, market makers began factoring higher LST holding costs into their quotes. As exit times lengthen further, market makers may begin demanding larger discounts. This creates a vicious cycle: LST's increasing deviation from its natural 1:1 peg leads to forced liquidations of LST positions, leaving market makers with a large backlog of LST inventory that needs to be redeemed, further lengthening exit queues. Furthermore, if the ETH perpetual swaps and futures contracts used to hedge LST inventory price risk experience backwardation (i.e., negative funding rates), market makers will face higher hedging costs, which will be passed on to end traders through larger LST discounts! Despite the recent increase in validator exit requests, the overall state of Ethereum staking remains balanced. Since mid-July, staking inflows have largely offset withdrawals, keeping total ETH staked stable at around 35.5 million. Unfortunately, this dynamic equilibrium doesn't mitigate the impact of longer withdrawal wait times, as Ethereum's deposit and withdrawal queues operate independently. Ethereum bulls quickly dismissed concerns about withdrawal queues as "fear, uncertainty, and doubt," citing the continued buying of ETH by digital asset funds and historical evidence of similar post-peak price strength. However, longer withdrawal wait times are more than just a superficial issue. This structural bottleneck, originally designed with good intentions, has also become a choke point for the DeFi ecosystem: longer exit times mean more severe LST discounts, higher hedging costs, and may trigger the risk of reflexive leveraged liquidation.