Regulatory pressure slows capital inflows, Ethereum staking rate approaches key milestone

Ethereum (ETH) staking is approaching a key milestone of 20% of all tokens being locked in staking contracts, but inflows have slowed after an initial rush as investors grow wary of regulatory risks.

Investors have deposited 23.9 million ETH into Ethereum’s staking network, including tokens that have been submitted and are waiting in the queue. Hildobby’s Dune Analytics dashboard shows that the total staked accounts for about one-fifth of the token’s 120 million supply.

Ethereum’s Shanghai upgrade allowed withdrawals from its proof-of-stake network starting in April, unleashing new demand for the second-largest cryptocurrency. Staking lets cryptocurrency owners lock up their tokens to participate in securing the network as validators in exchange for rewards, making it a popular investment for long-term investors, including institutional investors.

Since the upgrade, deposits have far outnumbered withdrawals by 4.5 million, worth $8.4 billion at current prices, as investors have flocked in, extending the wait time to set up new validators to around a month and a half.

However, the pace of inflows slowed last month compared with the initial surge.

“The slowdown is likely due to regulatory scrutiny of centralized exchanges,” Tom Wan, a research analyst at digital asset investment products company 21Shares, said in a note.

Wan pointed to early June as a “key turning point” for the inflows, when the U.S. Securities and Exchange Commission (SEC) sued cryptocurrency exchanges Binance and Coinbase. The agency claimed that both platforms, the largest ETH staking service platforms, were offering unregistered securities through their staking services.

21Shares’ Dune Analytics dashboard shows that net flows into ETH staking fell sharply for a period of time after the lawsuit, and on some days turned negative for the first time since early May. Flows have since returned to positive, but are lower than May levels.

(Source of Ethereum staking net flow from 4.11 to 7.10: Dune Analytics/21Shares)

Validator queue pressure is relieved

The slowdown in demand has helped ease pressure on the validator queue to activate new validators for the network. The wait time to deploy a new validator has dropped to 36 days from nearly 46 days in early June.

Irina Timchenko, Ethereum blockchain manager at staking service Everstake, said on Twitter that raising the threshold for new validators to enter the network each day would also help solve Ethereum’s congestion problem , reducing queue times by five days.

John “Omakase” Lo, managing partner at investment firm Recharge Capital, noted that still-long wait times are bad for investors and “will definitely reduce” staking traffic.

He explained that tokens transferred to stake will only receive rewards if they are stuck in a queue, thus reducing the effective annualized rate of return.

However, Katie Talati, head of research at digital asset investment firm Arca, said validator queues are less likely to affect capital inflows.

“Investors are more concerned about the unstaking queue, or how long it takes to withdraw funds from ETH stake.”

Decentralized staking assets on the rise

The risks of centralized staking services may prompt investors to turn to decentralized solutions.

“We are seeing a huge growth in staked assets on decentralized staking protocols like Rocketpool and Lido,” Talati noted.

The two decentralized liquid staking protocols have grown 5.4% and 6.3% respectively over the past month, outperforming Coinbase and Binance.