This week's news highlights the ongoing congestion facing Ethereum since Shapella. Case in point: as part of its bankruptcy proceedings, crypto lender Celsius Network staked $800 million worth of Ether (ETH) on the Ethereum network. The firm has been diligently moving ETH into staking contracts after redeeming staked ETH from liquid staking leader Lido Finance. This is part of Celsius’s decision to appoint Fahrenheit to manage a new entity to be owned by its creditors. Fahrenheit is a consortium that includes blockchain-based venture capital firm Arrington Capital and will provide the capital, management team and technology to establish and operate the new company, which has yet to be named.
This move has caused a stir among Ethereum validators, as it has significantly increased the deposit queue for staking and increased worries about the increasing congestion on the network. Currently, investors and LSD providers looking to earn yields on their ETH holdings have to wait over 45 days in the ‘deposit queue’ before they can deposit their 32 ETH as network validators on Ethereum. Data from two sources show waiting times for staking ether continues to increase. Exiting the network, on the other hand, takes just 0.013 hours, or less than a minute.
On Ethereum, validators process transactions and help maintain the overall security of the network after the transition to PoS. As of 5th June, nearly 93,000 validators are waiting in the “queue” to be able to enter the network and earn the nearly 5% annual yield through staking. This strong demand is from large ether holders and/or LSD protocols, who want to earn some passive income on their holdings instead of withdrawing their ETH. However, the ‘deposit queue’ is costing these would-be validators 3 months of returns from network fees while they wait to deposit.
According to reports, the validator deposit queue has doubled due to the influx of Celsius Network's ETH staking. This once again highlights the scalability issues that Ethereum network is currently facing. Having been plagued by congestion issues and high gas fees over the last few months (since Shapella upgrade and BTC’s Ordinals), the recent surge in ETH staking has only highlighted these issues.
This is in many ways a direct result of enabling withdrawals. Many ETH investors who have been holding ETH and sitting on the sidelines waiting to see what happened after Shapella are now entering the ‘deposit’ queue for staking. Given the current market dynamics, it does not make sense to ‘hold’ ETH anymore unless investors need to be incredibly liquid. Liquid staking derivatives offer consistent returns without custodial risk or having to exit. Creating validators represents the best-structured low-risk product available to Ethereum investors. It will be interesting to see if the queue continues to grow due to the lack of alternative low-risk strategies or continued macro uncertainty. There is also a very real centralisation risk for Ethereum as currently, Lido Finance has over 31% of staked ETH market share according to Dune Analytics.
Eventually, Ethereum should reach an equilibrium between deposits and withdrawals once the backlog in the ‘deposit queue’ has been integrated into the network. Overall this increased ‘demand’ for staking is positive. However, in the short term, it highlights how far away Ethereum still is from institutional-level scalability or speed. Institutional adoption will require TradFi equivalency for network withdrawals and deposits, not just Layer 2 transactions or throughput. Ethereum is still working towards this goal; however slowly.