In recent weeks, the growth rate of the Ethereum validator set has noticeably slowed, with an increasing number of validators choosing to exit voluntarily. This trend has contributed to a deceleration in Ethereum's issuance rate. Simultaneously, the amount of ETH being burned via EIP1559 continues to rise, and coupled with heightened network activity, the overall Ethereum supply is once again trending toward deflation.
Key Developments in Ethereum Staking
Since October, the Ethereum staking ecosystem has experienced a notable shift in dynamics. The number of validators exiting the network has risen significantly, a change that coincides with a broader bullish trend across digital asset markets.
This increase in validator exits has directly impacted the daily issuance of ETH, which is intrinsically linked to the amount of active ETH within the staking pool.
Concurrently, a renewed focus on tokens and stablecoins has driven an uptick in on-chain activity. This is reflected in higher gas fees being burned through the EIP1559 mechanism, pushing the Ethereum supply into a deflationary phase.
Understanding Validator Exits
While not as headline-grabbing as major exchange news, the Ethereum staking pool has undergone substantial changes since early October. A growing cohort of validators is now exiting the staking pool.
The Shanghai upgrade earlier this year enabled staking withdrawals, initially leading to a wave of validators exiting to claim rewards and reconfigure their staking setups. During that period, exit events averaged around 309 validators per day.
Since the beginning of October, we've witnessed a gradual increase in these exit events, reaching an average of 1,018 validators exiting daily. This upward trend aligns with the recent appreciation in digital asset spot prices.
Consequently, the total effective balance—representing ETH actively participating in the Proof-of-Stake consensus—has seen its growth rate slow considerably and is now experiencing its first decline since the Shanghai upgrade.
The growth slope of the total effective balance began flattening in mid-October, with daily increases slowing from previous rates of over 1% to just 0.1%—more than halving the growth pace observed since May.
A closer examination of exiting validators reveals that voluntary exits have driven most of the activity over the past eight weeks. Voluntary exits occur when stakers independently choose to leave the staking pool, distinct from slashing penalties imposed on validators who violate protocol rules.
During this same period, only two slashing events occurred, one of which was significant—involving 100 newly entered validators who were slashed for simultaneously signing two different blocks on the network.
Categorizing the Exits
Exiting validators can be further categorized by the type of staking entity they belong to, revealing several interesting trends:
- Since October, centralized exchanges (CEXs) have dominated staking withdrawal events, with Kraken and Coinbase showing the most significant outflows
- Liquid staking providers have also experienced minor staking reductions, though Lido remains the largest player in this sector
Several factors may be driving this investor behavior:
- Investors may be changing their staking configurations, such as moving stakes from CEXs to liquid staking providers (potentially due to ongoing regulatory concerns)
- Investors with access to US capital markets might be reallocating capital to perceived safer assets, such as US Treasuries, where interest rates remain attractive compared to ETH staking yields
- Investors might be anticipating upcoming market rallies and seeking greater liquidity for their ETH holdings rather than maintaining less liquid staked positions
Kraken and Coinbase have been particularly prominent in withdrawals, while among liquid staking providers, Lido has led in exits. However, these same entities—with Lido at the forefront—have also been the primary recipients of new staking deposits, demonstrating the net stickiness and dominance of these large pools.
On a net-change basis, Lido continues to grow and dominate, with its total staking balance increasing by 468,000 ETH. Among CEXs, Coinbase and Binance have seen net increases in their staking balances, while Kraken's staking balance decreased by 19,400 ETH. Among staking providers, HTX and Staked.us showed the most significant reductions in staking balances, decreasing by over 44,000 ETH each.
Impact on ETH Issuance and Supply Dynamics
Consistent with the observed reduction in effective balance, ETH issuance has correspondingly decreased. The amount of ETH issued daily to validators depends on the number of active validators, or respectively, the total effective balance in the staking pool.
As validator growth has slowed and declined, daily ETH issuance has similarly decelerated. Over the past seven days, the growth rate of ETH issuance has slowed by up to 0.5% daily. Notably, the issuance rate has actually decreased in recent days for the first time.
With issuance slowing, we now turn our attention to the complementary side of the equation—the burn rate. Since the London hard fork in 2021, the EIP1559 fee-burn mechanism has involved burning a portion of transaction fees, creating conditions for ETH supply to become constricted when network utilization is high.
Accompanying rising gas prices—which signal growing transaction demand on the Ethereum network—the amount of ETH fees burned daily has also increased. In October, we observed daily burned ETH fees reaching 899 ETH. Fast forward nearly a month, and the cumulative burned fees have now reached 5,368 ETH.
We can also assess a detailed breakdown of gas usage among various transaction types. These metrics allow us to identify which activities primarily drive supply destruction.
Upon examining two major areas that drove Ethereum network adoption over the past four months, it becomes apparent that both NFT transactions and DeFi transactions have contributed relatively little recently, declining by -3% and -57% respectively. Adoption rates in both sectors have been falling, and their contribution to recent on-chain activity has been minimal.
The recent surge in network activity is primarily attributed to token transfers and stablecoins. Over the past three months, token gas usage has increased by +8.2%, while stablecoin gas usage has risen by +19%. This suggests that as confidence in market strength grows, a light capital rotation into longer-tail assets might be occurring.
Since the London hard fork, ETH has transitioned from net inflation toward equilibrium, and even absolute deflation. The network experienced a brief period of net inflation between August and October due to lower network activity.
In recent weeks, with issuance rates declining and greater supply being burned, the overall ETH supply has once again turned net deflationary.
Frequently Asked Questions
Why are Ethereum validators exiting the network?
Validators are exiting for several reasons, including reconfigured staking setups, potential regulatory concerns regarding centralized exchanges, attractive alternative investments like US Treasuries, and anticipation of market rallies where investors prefer more liquid ETH holdings.
How does validator exit affect Ethereum's issuance rate?
The daily issuance of ETH depends on the number of active validators. As more validators exit, the growth rate of ETH issuance slows down, and if enough validators exit, the issuance rate can actually decrease, creating a deflationary effect on supply.
What is driving the increased network activity on Ethereum?
Recent network activity increases are primarily driven by token transfers and stablecoin transactions rather than NFT or DeFi activity. This suggests investors might be rotating into different assets as market confidence grows.
How does EIP1559 contribute to Ethereum's deflationary tendency?
EIP1559 implements a fee-burn mechanism that destroys a portion of transaction fees. When network activity and gas prices increase, more ETH is burned through this mechanism, reducing the overall supply and creating deflationary pressure.
What's the difference between voluntary exits and slashing?
Voluntary exits occur when validators consciously choose to leave the staking pool, while slashing is a penalty imposed on validators who violate protocol rules. Recent exits have been predominantly voluntary rather than resulting from slashing penalties.
Are centralized exchanges or liquid staking providers seeing more exits?
Currently, centralized exchanges like Kraken and Coinbase are showing significant outflows, though liquid staking providers like Lido are also experiencing some exits. However, these same entities continue to receive substantial new deposits, indicating their ongoing dominance in the staking ecosystem.
Conclusion and Implications
The Ethereum staking landscape has undergone significant transformation in recent weeks, with validator exits increasing substantially. This development has slowed the growth rate of ETH issuance and reduced the staking pool balance for the first time since the Shanghai upgrade.
Additionally, the recent surge in network activity—primarily driven by token transfers and stablecoins—has increased transaction demand. This has placed upward pressure on gas prices, resulting in increased daily ETH fee burns via EIP1559.
The combination of these two forces has pushed the global ETH supply back into deflationary territory. The interplay of these factors highlights the dynamic responsiveness of the Ethereum network, its supply mechanics, and its relationship to market activity and adoption trends. For those looking to explore real-time network metrics or track these developments more closely, understanding these fundamental dynamics remains crucial for informed participation in the Ethereum ecosystem.