Magnify #18: The ETH Withdrawals Conundrum 🤔

Ah, so you want to withdraw the fruits of your labour. The time has come. -Ethereum Staker, 2023

Withdrawals have been one of the core talking points within the Ethereum community. Over 1M in ETH rewards have accrued for all validators. And when the clock strikes Shanghai on Ethereum, they will be spewed out to the validators’ withdrawal address on the Execution Layer. In the words of the laborious Ethereum validator who began their journey back in 2020, it’s going to rain money.

Ok, maybe not rain. But you get the point.

For the uninitiated: If your validator has rewards over 32 ETH, you will get all of them in your wallet. If you want to exit your validator from the network, you will get back all those rewards plus the principal. For the former, the sweep happens once every week. Thus, all your jUiCy staking yields get collected in your ETH wallet every week.

So, this is the Ethereum stakers’ aha moment. Or is it?

Umm, no. Shanghai enables validators’ access to withdrawals by incurring a cost to capital efficiency. And that’s where the conundrum begins.

Capital efficiency is a myth - CS’ unpaid intern

Ok, it’s not a myth. But for Shanghai, it is.

The frequency with which withdrawals are processed on Ethereum is proportional to the number of validators on the network. The more the number of validators, the longer it takes to get the rewards. While this time is usually contained within 7 days for partial withdrawals, for full withdrawals, it can go up to several months. Let’s imagine a scenario.

Let’s say you and a few other users’ stake has been bonded to one validator. After some time, you all decide to unstake all the assets you staked initially. Since several other validators are exiting the network simultaneously, the exit process and withdrawal of funds can take anywhere from a couple of days to a couple of months to get the entire staked ETH.

Moreover, once you’ve already signed an exit message on the Ethereum network, it’s irreversible. After 15 days, if you wish not to cancel the request, you cannot do anything but wait for the entire withdrawal to be processed.

It’s the same as me telling my gf she’s dumb; i can never take that back - CS’ unpaid intern 2

Now, that’s capital inefficient.

Imagine waiting in the queue for months to get your entire ETH back. It hinders the user experience. And it forces you - the user - to do anti-gravity backflips to get your ETH back. What are these anti-gravity back-flips?

Redeeming your liquid-staked assets for native assets on a liquidity pool and losing significant returns to slippage.

Wait a second…how did we jump from liquid staking tokens and ETH withdrawals to liquidity pools? How are the two connected? Sorry for that confusion cause…

What is the problem with liquidity pools?

The same problem that we’ve been highlighting for the past two years. These pools are formed by heavy liquidity mining incentives (governance tokens). If that incentive isn’t there, who here cares about supplying exit liquidity to someone else while the liquidity provider gains nothing more than a highly volatile yield - which gets exacerbated by IL risks?

You see, trading on a DEX has its problems. One of them being slippage in highly volatile conditions. In short, our ongoing analysis shows that you lose anywhere between 0.2 to 10% of the value you gain from rewards when trading on a DEX.

Anything above a 1% loss, and you’re already losing a significant portion of your yield! Is this the experience you deserve for securing the network with your stake?

What do?

Imagine a world where these problems didn’t exist.

Imagine a world where you could customize specific parameters for your liquid-staked derivative position to sell it off in the market and get your native asset back.

Imagine that you would get your native asset back at a 1:1 rate.

Imagine that you can create and cancel your unstaking orders at any given time.

Imagine that there’s just one solution for your liquid-staking related needs across various networks and DeFi ecosystems.

No, this isn’t utopia.

But this is us telling you of what’s soon going to be very possible 😉