Original author: Alice Kohn, Glassnode
Original compilation: Luccy, BlockBeats
Editor's note: Glassnode summarized and analyzed the hot market data in the past week and pointed out that the number of Ethereum pledge validators withdrawing from the pool has gradually increased recently, resulting in a slowdown in the growth rate of ETH issuance. At the same time, a surge in network activity, particularly token transfers and the push for stablecoins, has led to increased transaction demand, which has in turn put upward pressure on gas prices and the fee for daily ETH destruction via EIP 1559. The combination of these two forces has once again led to a deflationary trend in global ETH supply.
The growth of the Ethereum validator set has slowed in recent weeks, with more and more validators choosing to voluntarily withdraw. This has led to a slowdown in the issuance of Ethereum. At the same time, with the increasing number of Ethereum destroyed through EIP 1559 and the growth of network activity, the supply of Ethereum is once again showing a deflationary trend.
Summary
Since October, Ethereum staking pools have experienced a significant trend change, signaling an increasing number of validators opting out. This change correlates with the broader bullish trend in the digital asset market as a whole.
The increase in validator exits has led to a decline in daily Ethereum issuance, which is related to the amount of Ethereum active in the staking pool.
At the same time, we observed an increase in network activity due to the renewed focus on tokens and stablecoins. This was manifested in an increase in gas fees burned via EIP 1559, triggering a deflation in the Ethereum supply.
Without a doubt, the most notable news of the past week was the resignation of Binance CEO CZ. The settlement with the authorities amounted to $4.3 billion, and many saw this pivotal event as a sign of the end of the “Wild West” era in the digital asset industry.
Following the announcement, BNB’s price experienced a -9.1% decline. However, compared to previous price declines, such as the -24% drop when the SEC announced the charges, the market reaction was relatively mild.
Following the news, Binance exchange saw an uptick in withdrawal activity for major assets. In the first 24 hours, the combined balance of a range of DeFi “blue chips” fell -6.7%, while BTC, ETH, and stablecoin balances fell -4.4%, -4.9%, and -2.2%, respectively.
However, in the six days following CZ’s resignation, these trading balances recovered, with all four token categories seeing slowing outflows and even seeing net inflows. In many ways, this shows the level of trust users have in the Binance platform. It can also be argued that confidence could increase further given the regulatory requirements from US regulators over the next three years.
Validator Exit
While not making as much headlines as the Binance settlement, the Ethereum staking pool has experienced significant changes since early October. Currently, more and more validators are exiting the staking pool.
Shanghai enabled stake withdrawals, followed by a massive exit of validators to claim rewards and re-adjust their stake providers and settings. During this time, exit events averaged 309 validators per day.
Since the beginning of October, we have seen a gradual increase in exit events, reaching an average of 1,018 validators per day. This upward trend is consistent with the recent upward trend in spot prices in the digital asset market.
As a result, the total effective balance of ETH representing active participation in the Proof-of-Stake consensus in staking pools has slowed in growth and is currently experiencing its first decline since the Shanghai upgrade.
The growth slope of total effective balances began to flatten in mid-October, increasing by an average of 0.1% to 1% per day, slowing the growth rate since May by more than half.
When examining validator exits in more detail, we can see that over the past eight weeks, they have been driven primarily by voluntary exits. Voluntary exits are those that independently choose to exit the staking pool. This is different from slashing, the penalty faced by validators who violate the protocol rules.
During the same time period, only two slashing events occurred, one of which was a major event involving 100 new validators being slashed for signing two different blocks on the network at the same time.
The exiting validators can be further categorized based on the type of staker they belong to. This reveals some interesting trends:
· CEXs have been dominating staking withdrawal events since October, with Kraken and Coinbase seeing the most notable outflows.
Liquidity staking providers also experienced some minor staking reductions, with Lido remaining the largest player in the space.
This investor behavior may be driven by a number of factors:
Investors choose to change their staking setup, such as moving staking from a CEX to a liquid staking provider (likely due to ongoing regulatory concerns).
Investors with access to U.S. capital markets may move capital into safer assets, such as U.S. Treasuries, as interest rates remain high relative to ETH staking returns.
Investors may also be seeking greater liquidity in their ETH holdings in anticipation of the upcoming market upswing, rather than the less liquid staked ETH.
Kraken and Coinbase stand out in withdrawals, while among liquid staking providers, Lido leads in exits. However, these same entities, led by Lido, are also the top recipients of 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 staked balance increasing by 468,000 ETH. On the CEX side, Coinbase and Binance saw a net increase in staked balances, while Kraken saw a decrease of 19,400 ETH. Among staking providers, HTX and Staked.us demonstrated the most significant reductions in staking balances, each losing over 44,000 ETH.
In line with the observed decrease in effective balance, ETH issuance has also decreased accordingly. The amount of ETH issued to validators each day depends on the number of active validators, or respectively the total effective balance in the staking pool.
As the growth of validators slows and declines, the daily issuance of ETH has also slowed down accordingly. Over the past 7 days, the growth rate of ETH issuance has slowed by up to 0.5% per day. Notably, the issuance rate has dropped for the first time in recent days.
With the issuance velocity declining, we now turn our attention to the complementary side of the equation - the burn rate. Starting with the 2021 London hard fork, EIP 1559’s fee burning mechanism involves burning a portion of transaction fees, creating conditions for ETH supply to become tighter as network usage increases.
Along with rising gas prices, which signals a growing demand for transactions on the Ethereum network, the amount of ETH fees burned per day is also increasing. In October, we saw 899 ETH burned per day. Fast forward almost a month, and the cumulative fees burned have now reached 5,368 ETH.
We can also assess a detailed breakdown of gas usage between various transaction types. These metrics allow us to identify activities that primarily result in supply destruction.
After examining the two areas that have primarily driven Ethereum network adoption over the past four months, it is clear that both NFT trading and DeFi trading have contributed relatively little over the past four months, declining by -3% and -57% respectively. Both areas have seen declining adoption and have contributed little to the latest activity on the chain.
The recent surge in network activity can be largely attributed to token transfers and stablecoins. Token gas usage has risen + 8.2% in the past three months, while stablecoin gas usage has increased + 19% . This suggests that a light capital rotation into longer-tail assets may be occurring as confidence in market strength grows.
Since the London hard fork, ETH has moved from a state of net inflation to a state of equilibrium, or even absolute or deflation. The network experienced a brief period of net inflation between August and October due to lower network activity.
In recent weeks, overall ETH supply has turned net deflationary again, due to a decline in issuance velocity and a larger portion of supply being destroyed.
Summarize
Ethereum staking pool dynamics have changed significantly in recent weeks, with the number of validators exiting the pool starting to increase. This resulted in a slowdown in the growth of ETH issuance and a reduction in staking pool balances for the first time since the Shanghai upgrade.
Additionally, the recent surge in network activity, especially driven by token transfers and stablecoins, has led to higher transaction demand. This in turn has put upward pressure on gas prices, with an increase in ETH fees burned daily via EIP 1559.
The combination of these two forces has resulted in global ETH supply becoming deflationary again. In this context, the interaction of these factors highlights the dynamic response of the Ethereum network, supply, and market activity and adoption trends.
