Ether (ETH) staking is nearing a key milestone of 20% of all tokens locked up in staking contracts, but inflows have slowed after an initial rush as investors grow cautious about regulatory risks.

Investors have deposited 23.9 million of ETH to Ethereum’s staking network, including tokens committed and waiting in a queue. The total accounts for roughly fifth of the token’s 120 million supply, a Dune Analytics dashboard by Hildobby shows.

Ethereum’s Shanghai upgrade, which allowed withdrawals from its proof-of-stake network starting in April, unleashed fresh demand to stake the second largest cryptocurrency. Staking lets crypto owners lock up tokens to participate in securing the network as a validator in exchange for a reward, making it a popular investment among long-term investors including institutional investors.

Since the upgrade, deposits have far outpaced withdrawals by 4.5 million, worth $8.4 billion at the current price as investors rushed in, jacking up the waiting time to establish new validators to around one-and-a-half month.

However, the pace of inflows waned last month compared to the initial surge.

“The slowdown is likely to be driven by regulatory scrutiny on centralized exchanges,” Tom Wan, research analyst of digital asset investment product firm 21Shares, said in a note.

Early June was “a key turning point” for inflows, Wan noted, when the U.S. Securities and Exchange Commission (SEC) sued crypto exchanges Binance and Coinbase. The agency alleged that the platforms, both among the largest ETH staking services, offered unregistered securities with their staking service.

Following the lawsuits, net flows into ETH staking plummeted for a period and turned negative on some days for the first time since early May, a Dune Analytics dashboard by 21Shares shows. Since then, flows returned to positive but at a lower level than in May.

Validator queue eases

Slowing demand contributed to alleviating the pent-up queue to activate new validators to the network. The waiting time to deploy new validators decreased to 36 days from a peak of almost 46 days in early June.

Increasing the threshold of new validators entering the network per day also helped Ethereum work through the clog, dropping the queue by five days, Irina Timchenko, Ethereum blockchain manager at staking service Everstake, tweeted.

The still-elevated waiting time is detrimental for investors and “will definitely decrease flows” into staking, John “Omakase” Lo, managing partner of investment firm Recharge Capital, told CoinDesk.

The tokens transferred to staking do not earn rewards until they are stuck in the queue, lowering the effective annualized yield, he explained.

However, Katie Talati, head of research at digital asset investment firm Arca, said that the validator queue is less likely to affect inflows.

“Investors are more concerned with the unstaking queue, or how long it takes to remove money from ETH staking.”

Decentralized staking rising

Risks around centralized staking services have likely driven investors to decentralized solutions.

“We have seen a large amount of growth in staked assets with decentralized staking protocols such as Rocketpool and Lido,” Talati pointed out.

The two decentralized liquid staking protocols grew by 5.4% and 6.3%, respectively, through the past month, outpacing Coinbase and Binance.

Analysis Markets ETH Ethereum Eth staking Staking

Krisztian Sandor

Krisztian Sandor recently graduated from NYU's business and economic reporter program as a Fulbright fellow and worked with Reuters and Forbes previously. Originally from Budapest, Hungary, he is now based in New York. He holds BTC and ETH.