Jessy, Golden Finance
Recently, Ethereum has witnessed a rare unlocking frenzy, with over 900,000 ETH queuing to exit, waiting to be unlocked, with the longest wait reaching 16 days. The price of Ethereum also dropped significantly after hitting a high of $4789, declining for nearly a week, reaching just above $4000 at its lowest.
Is the market's concern caused by the excessive number of Ethereum unlocking in the queue, leading to the drop in Ethereum's price? Why is there such a large amount of funds eager to exit? What market logic lies behind this?
The chain reaction of 900,000 ETH queuing for unstaking
To understand this unlocking frenzy, one must first understand Ethereum's PoS mechanism. Since Ethereum transitioned to the 'PoS' mechanism, validators can participate in block production and transaction verification by staking at least 32 ETH, earning an annualized return of about 2%-4% in return.
Unlike traditional financial markets, Ethereum's staking mechanism is not open for entry and exit at any time. To maintain network stability, the Ethereum protocol has set exit limits: only a limited number of validators are allowed to exit during each epoch (approximately 6.4 minutes). This mechanism ensures that large-scale redemptions in a short period do not lead to a sudden drop in network security. However, it also means that when exit demand surges, a 'queue phenomenon' like the one we see today can occur, lasting more than ten days.
The most direct trigger for this unlocking frenzy actually stems from the abnormal surge in ETH lending rates on decentralized finance lending protocols, especially on the Aave platform.
The article by Galaxy Research points out that starting from July 14, the ETH lending rates on the Aave protocol began to surge periodically. Although lending rates usually range between 2% and 3%, they soared to 18% on July 16, 18, and 21.
This fluctuation was caused by a sharp decrease in the supply of ETH on the Aave platform, triggered by a wallet associated with the HTX exchange withdrawing a large amount from the platform. Since June 18, this wallet has withdrawn over 167,000 ETH. The sudden drop in ETH deposits has put pressure on users running ETH circular strategies on the Aave platform, also leading to a surge in some redemption requests.
Under Aave's algorithmic interest rate model, when borrowing demand far exceeds the available lending supply, the interest rates will automatically spike.
This drastic change in interest rates has directly destroyed the 'ETH circular leverage' strategy widely used by many investors. When borrowing costs (18%) far exceed Ethereum's staking yield (about 2.9%), this strategy is no longer a profit amplifier but has turned into a loss machine. Facing rapidly rising capital costs, many traders and institutions employing such strategies were forced to 'de-leverage', with the only choice being to unlock their staked ETH to repay high-interest loans. This forced and large-scale liquidation behavior constitutes the main body of this exit queue.
Unstaking ≠ selling; this is not a crisis but a sign of Ethereum's maturity.
However, there are indeed large holders taking profits. Before this, the price of ETH experienced a strong rise, almost reaching new highs, and many early stakers locked in huge gains on their assets. Choosing to exit near the price peak, unlocking staked ETH and selling it in the secondary market is a classic operation to lock in profits and realize investment returns. Therefore, a significant portion of the ETH exiting the queue comes from these long-term investors.
The concentrated liquidation of leveraged strategies has triggered a chain reaction in the market, creating entry opportunities for a third force—arbitrageurs.
When a large number of users are eager to sell liquid staking tokens (such as Lido's stETH) to repay loans, a brief 'decoupling' occurs between their prices and the underlying asset ETH, providing an opportunity for shrewd arbitrageurs. They buy large amounts of liquid staking tokens at a discount and then redeem these tokens for ETH at a 1:1 ratio through official channels, thus obtaining risk-free profits. This arbitrage behavior undoubtedly further increases the length and scale of the exit queue.
However, it is worth emphasizing that although the current price of Ethereum has fallen due to potential selling pressure, this round of unlocking frenzy is not a crisis signal. On the contrary, it proves the strong resilience of Ethereum's PoS mechanism and ecosystem. The behavior of market participants is based on clear economic signals rather than panic emotions. Ethereum's exit mechanism operates smoothly as designed, orderly processing an unprecedented volume of requests.
This indicates that this is not a crisis; rather, it is a strong proof of Ethereum maturing as a decentralized financial ecosystem. An article by Galaxy Research also points out that despite large-scale withdrawals, new staking demand remains strong, almost offsetting the impact of the withdrawals. This indicates that the market still has confidence in Ethereum's long-term prospects.
