Ethereum's activation and exit queues

• The churn limit, which governs Ethereum's validator activations and exits, is a parameter that protects the network's stability.
• At the current churn limit there can only be 8 validator activations or exits per epoch, and any simultaneous demand to stake or withdraw beyond that threshold will have to wait in an activation or exit queue to be processed.
• This limit means that only ≈0.04% of the circulating ETH supply can be activated per day (≈1800 validators per day), and any staking demand spiking beyond that limit will have to wait in a first-come-first-serve line to start earning Ethereum network rewards.
• The Shapella Upgrade, scheduled for April 12th, 2023, will enable Ethereum validators to execute partial and full ETH withdrawals for the first time. This is seen as a significant milestone that will de-risk the participation and opportunity cost of ETH staking, with sources citing that as much as 40% of the current circulating supply of ETH could enter staking following the upgrade.
• A spike in demand representing just 4% of the circulating supply would take over 83 days to become active on the network and eligible to earn rewards at the churn limit of 8 validators/epoch. At the same time, some recent analyses project the withdrawal queue on Ethereum to exit staking will range from days to months.
• Liquid staking tokens (LSTs) present a critical solution to the liquidity problems introduced by extensive validator entry and exit queues.

Ethereum's activation and exit queues are mechanisms to protect the stability of Ethereum's proof of stake (PoS) consensus. Specifically, Ethereum's churn limit, a parameter that defines a cap on how many validators can be processed by the activation or exit queue, ensures that the validator set remains stable and that the chain's finality guarantee is not affected by many validators joining or leaving the network at the same time.

In simple terms, this means that there is a defined limit on how much ETH can be staked—and a limit on how many staking withdrawals can be initiated—on Ethereum within a given epoch (≈6.4 minutes).

Following Ethereum's Shapella Upgrade, currently scheduled for April 12, 2023, partial and full withdrawals will be enabled for Ethereum validators for the first time. As the network prepares for this important dynamic to be live, recent analysis has focused on the potential models for how the exit queue will affect withdrawal timelines.

However, according to the current churn limit, only about 0.04% of the circulating ETH supply can be staked per day. If there is immediate demand beyond that amount of ETH any new validators will need to wait in a first-come-first-serve queue to be activated, neither earning rewards nor accessing liquidity on their staked ETH while they wait. In the past, Ethereum's activation queue has reached up to a nearly three week wait to stake when demand is high.

The parameters defining validator activations and exits could have significant implications for stakers. Liquid staking tokens (LSTs) present a critical solution to the liquidity problems introduced by extensive validator entry and exit queues.

In this post, we'll explain how the activation and withdrawal queues are determined before exploring how we think they may affect stakers' ability to participate over the coming year.

Ethereum's churn limit

Ethereum's churn limit is responsible for this critical job of ensuring that Ethereum's active set remains stable over time—put simply, it is a parameter that ensures there is a limited amount of “churn” in the protocol's active set.

The churn limit depends on the number of validators that are already active on the network. The more validators that are active on Ethereum, the more new validator activations, and exits of existing validators, can be processed per epoch (one epoch = 32 validator voting slots, or about 6.4 minutes).

In other words, for every 65,536 additional validators that are active on the Ethereum network, the number of new validators that can be activated per epoch increases by one, and the number of validator exits that can be processed per epoch also increases by one.

That means ≈2,097,152 ETH, the equivalent of $3.9B USD at the time of writing, must be onboarded to Ethereum staking before each subsequent cliff to add one more validator to the per epoch churn limit.

Currently, the churn limit is set at 8. You can view Ethereum's current churn limit in real-time here.

As independent crypto researcher Tripoli noted in a recent analysis modeling potential scenarios for withdrawals post-Shapella Upgrade, a balanced ratio of incoming stakers with withdrawals from exiting stakers could lead to an effectively 'balanced' churn limit post-Shapella, whereas until this point the churn limit has only increased over time.

"A queue will form to both activate new validators and for validators to full exit. The double-ended queue will lock the churn limit and effective validator count at a value until one side of the queue subsides. I suspect that the community will see the Shanghai hard fork as a sufficient de-risking event and result in a surge of new validator deposits, but there will also be many validators that have decided staking is not the right choice for them.”

—Source: Tripoli, Partial withdrawals after the Shanghai fork, Data Always

Determining the Ethereum activation queue

Registering a new validator node on Ethereum requires depositing 32 ETH into the Ethereum deposit contract, submitting a transaction that includes key credentials for the validator. The churn limit rate-limits the number of new validators that can be activated, or marked as eligible to be selected to perform work and receive network staking rewards in exchange, per epoch.

Before validators are activated on Ethereum they must first wait for a period of at least four epochs. The minimum wait of four epochs to be activated is designed to ensure that RANDAO, the random beacon that chooses validators as block proposers, cannot be manipulated.

The pending validators must then must be voted in by active validators, with the number that can be voted in per epoch determined by the churn limit (so: for every 65,536 additional validators activated on the network, the number of new validators that can be activated per epoch increases by one).

If the number of new validators looking to enter the active set exceeds the churn limit, then new validators will have to wait in a first-come-first-serve activation queue before they are activated. This could stretch from a couple of days to a couple of weeks, or even months.

Determining the Ethereum withdrawal lifecycle and exit queue

Similarly, Ethereum's churn limit determines how many validators can start the process of withdrawing ETH and leaving the network's active set at any point in time. However, the full withdrawal lifecycle also includes a separate withdrawal period. Withdrawing staked ETH first requires submitting a withdrawal transaction to the Ethereum deposit contract.

There are three versions of withdrawal request:

• Partial withdrawal: A validator can request to withdraw a percentage of their ETH staked. This can be used to withdraw and distribute any Ethereum network rewards earned above the 32 ETH stake required to operate an active validator.
• Full exit, voluntary: If a validator voluntarily submits a request to fully exit the active set, they are entered to the withdrawal lifecycle to withdraw their staked ETH from the network.
• Full exit, slashing: If a validator is slashed for misbehaving on the network, they are automatically entered into the withdrawal lifecycle to be fully removed from the active set and withdraw their staked ETH from the network, minus any slashed ETH.

Partial withdrawals are handled differently than full withdrawals. In most cases, post-Shapella upgrade partial withdrawals will be automatically distributed for any funds above the 32 ETH minimum required to operate a validator, although immediately after the upgrade certain factors such as the style of withdrawal address registered by the validator may affect partial withdrawal timing. You can learn more about how partial withdrawals will be handled post-Shapella here.

When a validator starts a full exit, whether voluntary or due to slashing, their request to exit has the same maximum throughput per epoch as the activation queue, determined by the churn limit (so: for every 65,536 additional validators activated on the network, the number of validators that can be exited per epoch increases by one).

If more validators are exiting than can be processed per epoch, the pending validators will have to wait in a first-come-first-serve exit queue before they are moved to the next phase of the withdrawal lifecycle.

Partial withdrawals, and both kinds of full exits, must then wait for an additional withdrawal period. The length of the withdrawal period is determined by whether their withdrawal is voluntary or whether their withdrawal was automatically triggered due to a slashing:

• Partial withdrawals and voluntary validator full exits must wait an additional ≈27 hour period before they can withdraw their ETH. This helps to ensure that there's a period of time to catch the validator for slashing if they recently misbehaved, along with providing some time for other key functions, like including recent rewards and making custody challenges.
• If a validator is slashed, they must wait an additional ≈36 days before they can withdraw their ETH minus slashing penalties. This provides an extra punishment for misbehavior, along with providing some time to determine whether there was correlated slashing across validators.

We believe that this increased withdrawal period for slashing emphasizes why it's important to stake with node operators that have proven performance and security standards; while slashing coverage can help reimburse stakers in the event of a slashing incident, any slashing incident will still trigger ETH being locked in a withdrawal period for at least 36 days, during which time it is not earning rewards and cannot be accessed.

Because of the variability across how many partial withdrawals will be immediately requested post-Shapella upgrade, how many new full exits may be requested, and the balanced correlation in how the churn limit can be affected by both incoming deposits and outgoing withdrawals, there is a wide variance in current projections of how long the Ethereum withdrawal lifecycle will take once withdrawals are enabled.

Some recent analyses project a range of about four days to up to 60 days to fully exit a validator, depending on the percentage of validators that opt for partial or full withdrawals and other network dynamics.

Activation and exit queues, the Shapella Upgrade, and what it all means for liquid staking

In early 2022, Ethereum's activation queue reached a backlog of nearly three weeks. By June, the queue was back down to one day, with analysis from Figment showing that the backlog behavior was dependent on both the changing activation queue parameters (a backlog building up as the queue parameters neared the next cliff for increasing the activation rate), along with overall participant sentiment toward staking changing how many new validators were entering the queue at one time.

According to a recent survey conducted by Kiln of over 100 brokers, market makers, exchanges, wallets, custodians, banks, and DeFi investment firms with over $10B in assets under management, over 68% of respondents intend to start staking or compound their stake after the Shapella Upgrade, with 70% of those respondents planning to stake “right away” after the upgrade, and only 9% of all respondents intending to unstake upon Shapella.

Extrapolating on the results of their survey to simulate entrance queue volume, Kiln notes that if 42% of ETH holders intend to start staking 30% of their ETH assets shortly following the Shapella Upgrade, representing 408k new validators or the equivalent of $24B USD at the time of writing, the resulting entrance queue would take 176.3 days for all of that ETH to be staked.

Some experts estimate that the post-Shapella staking demand could exceed 40% of the circulating supply. However, according to the current churn limit, new validator entries are capped at roughly 0.04% of the circulating ETH supply, or 1800 validators per day, and any demand spiking beyond that limit will have to wait in a first-come-first-serve line to start earning rewards.

This may result in a significant waiting time for new participants to start earning staking rewards. According to historical deposit data, we have already witnessed daily deposits exceed 10x+ daily activation capacity. Post-Shapella, these activation queues are expected to increase even further.

If just 10% of this predicted Post-Shapella staking demand tried to come online immediately following the upgrade (representing 4% of the circulating supply), it would take over 83 days for that stake to become active on the network and eligible to earn rewards, representing nearly three months of missed opportunity for rewards.

Liquid staking tokens post-Shapella

At best, we believe that the potential for prolonged staking activation and exit queues will represent a significant opportunity cost for stakers who may see delays in receiving Ethereum network rewards, or face delays in accessing liquidity on their previously staked ETH. At worst, queues could represent a continued barrier for participants looking to offer products and services based on staking that require higher liquidity and redemption timelines, such as structured products, ETPs, or ETFs.

After the Shapella Upgrade, when withdrawals are enabled on Ethereum, liquid staking tokens (LSTs) will continue to be a way to access liquidity while directly participating in staking. LSTs, like LsETH, are receipt tokens representing ownership of the staked ETH and any rewards earned from participating in the network, allowing users to directly participate in staking while also accessing additional liquidity and capital efficiency.

In addition to LSTs' ability to be used in DeFi and other dapps while the holder participates in staking, the parameters of Ethereum's activation and exit queues illustrate the importance of liquid staking tokens for facilitating faster liquidity post-Shapella. If the queues to both enter staking and exit staking are long, participants may be looking for more flexibility and optionality in entering and exiting staking positions.

Even hodling stakers who aren't concerned with instant liquidity may find LSTs more attractive than waiting to start earning rewards. If the queues to both enter staking and exit staking remain backed up for participants—delaying the ability to participate in staking from days to weeks—participants may still have the ability to trade in or out of staking positions by purchasing or selling liquid staking tokens on the open market.

As a result of the reduced technical staking risk following Shapella and added liquidity benefits, some analysts expect that LSTs may begin trading at a premium over the next year as stakers realize the significant delays caused by existing churn limits.

What's next

For a high-level overview of the Liquid Collective protocol's Ethereum withdrawal implementation and target timeline for implementing withdrawals, view the post here. Liquid Collective is currently aiming for the withdrawals Goerli testnet phase with official operators to start in mid-April, and for the targeted mainnet upgrade release to happen in mid-May if the testnet phase is validated.

Liquid Collective will continue to share information about how the liquid staking protocol will implement Ethereum withdrawal capabilities in the days and weeks to come, following Ethereum's successful Shapella upgrade. Follow @liquid_col on Twitter for more analysis and insights on Ethereum's activation and exit queues, and to learn more about the protocol's withdrawal implementation.

Liquid Collective is the secure liquid staking standard: a decentralized protocol designed to meet the needs of institutions, built and run by a collective of leading web3 teams. Learn about liquid staking, LsETH, and the protocol's Slashing Coverage Program in the Liquid Collective Litepaper.