Knights coach Nathan Brown said the desire to develop other rookies outweighed any on-field value Joseph Tapine would have offered, after agreeing on Monday to grant him a release.
Tapine announced last week he had signed a lucrative three-year deal with Canberra, with an option for a fourth season, starting in 2017.
The 21-year-old back-rower was content to play out the season with Newcastle before joining the Raiders, but the Knights felt that would have been counter-productive to their youth policy.
Instead they investigated all options, including the possibility of a player swap with Canberra, before deciding the best outcome for both parties would be to go their separate ways.
Newcastle now have the balance of Tapine's contract that they can potentially use to sign a new recruit, while the Wellington-born tyro is expected to expedite his move to Canberra within a matter of days.
"Look, there's no doubt at all that Joe Tapine would have been playing some footy for the Knights this year," Brown told Fairfax Media.
"Everyone would agree about the talent that we think Joe's got.
"But if you're playing Joe ahead of Lachlan Fitzgibbon and Daniel and Jacob Saifiti, who are home-grown players who are here for much longer term, it doesn't make much sense.
"With Joe, we went through a process and we did try to get a business transaction. Joe made a business decision that suited him, and we looked at a number of avenues that might have helped us.
"We have to do the right thing by our club … as a coach hoping to develop young players, you're happy to put the hard work into them if two or three years down the track, you're going to get some rewards."
Brown said it was a different situation with off-contract forwards Robbie Rochow and Tariq Sims, who were both senior players.
"If Tariq Sims or Robbie Rochow decided to move on, they're already done so much of their development, they're good experienced players," Brown said.
"They actually help to mentor the young players, whereas Joe fits into a category of being a young player, and we've got a lot of them at the moment who we hold in high regard. You actually need them to be at your club for a number of years to get the value out of them."
Brown said Fitzgibbon, who played one NRL game last year, and the 19-year-old Saifiti twins were all genuine NRL options after the 34-28 trial loss to Canberra last weekend. "All three of those boys were outstanding on the weekend," Brown said. "They're certainly putting their hands up."
Knights CEO Matt Gidley said threats by Tapine's agent, Jim Banaghan, to launch legal proceedings had no bearing on Newcastle's decision to grant an early release.