Ethereum News Today: Ethereum stakers face 9-day wait as stETH liquidation cascade triggers 18% rate spike

Ethereum stakers are encountering a critical liquidity crunch as the unstaking wait time for validator exits has extended to nine days—the second-longest in post-Merge history—due to a cascading unwind in liquid staking token (LST) leverage. According to Galaxy Digital Research, the surge in the validator exit queue, which now exceeds 475,000 validators, stems from a large-scale withdrawal of ETH from Aave initiated by a wallet linked to HTX (formerly Huobi). This capital rotation reduced ETH supply on the lending platform, causing Aave’s ETH borrow rates to spike from approximately 3% to over 18%. The sharp rate increase rendered leveraged stETH positions unprofitable, triggering a mass liquidation of recursive stETH loops [1].

The unwinding unfolded through two primary channels. Some loopers sold stETH on automated market makers (AMMs), depreciating the peg against ETH by 30–60 basis points. Others opted for validator redemptions, exacerbating the backlog in the exit queue. Despite the May Pectra upgrade, which increased the daily validator exit limit to about 12 per epoch, the volume of withdrawal requests overwhelmed the system. The nine-day delay has created a feedback loop, with arbitrageurs now demanding higher yields to offset the extended redemption period. Analysts estimate the annualized yield from arbitraging a nine-day delay is 25%, but if the queue doubles to 18 days, the take rate could rise to 100–110 basis points [1].

The episode has exposed vulnerabilities in Ethereum’s liquid staking infrastructure. The stETH/ETH peg currently stands at 0.995, while on-chain AMM liquidity for stETH has fallen from $280 million to $180 million. Most lending protocols, including Aave and Maker, rely on stETH’s redemption oracle rather than market price, mitigating immediate liquidations. However, prolonged redemption delays could force deleveraging as interest accrues. Galaxy Research described the event as a “warning shot,” emphasizing the fragility of the LST ecosystem and advocating for design upgrades like peer-to-peer exit markets, rate smoothing, and fixed-term vaults to reduce dependency on redemption queues [1].

While ETH’s spot price has remained resilient—supported by strong ETF inflows of $300–600 million daily—the depeg has left stakers in a precarious position. Leveraged loopers face a trilemma: accept a 5–6% loss by selling stETH at a discount, endure high borrowing costs while waiting nine days, or hope borrowing rates fall. “These guys thought the stETH looping trade was free money and now they are stuck between a rock and a hard place,” noted analyst Robdog.eth [1].

The situation highlights the tension between institutional demand for ETH via ETFs and the fragility of liquid staking mechanisms. Some traders speculated that OTC ETH scarcity might amplify the depeg, but on-chain data suggests leveraged stETH unwinds remain the dominant factor. Wintermute’s CEO cited challenges in sourcing ETH, though this appears secondary to the systemic unwinding of leveraged positions [1].

Galaxy’s report underscores the need for structural reforms to stabilize the LST market. Without improvements, further volatility could erode confidence in Ethereum’s staking infrastructure, particularly as redemption queues and borrowing costs remain volatile.

Sources:

[1] [Ethereum stakers face 9-day wait as stETH loops fall into the red](https://blockworks.co/news/ethereum-stakers-9-day-wait-steth)