Ethereum has experienced a drop in user activity, affecting its burn rate and increasing circulating supply, which presses inflation on ETH’s price. While fundamentals appear robust, the recent migration to Layer-2 solutions raises concerns about Ethereum’s immediate prospects and price stability as the network grapples with increased supply and reduced demand. Currently, ETH trades around $1,834 with potential for upward movement, contingent on market conditions.
Ethereum has recently seen a sharp decline in user interaction with its blockchain. This trend has led to a drop in the network’s burn rate, a key mechanism designed to reduce the supply of ETH over time. Due to fewer tokens being burned, there’s been a noticeable increase in ETH’s circulating supply, which adds inflationary pressure and makes it tough for the price to stay stable above the $2,000 mark lately.
Data from Ultrasoundmoney indicates that in just a month, 72,927 ETH, currently worth around $134 million, has entered the circulating supply. Now, that total sits at 120,730,199 ETH, which is a significant jump compared to levels before the Ethereum Merge. The slowdown in user activity is the primary catalyst behind this heightened supply, as the burn rate has dropped drastically. Ethereum’s EIP-1559 introduced a model where transaction fees are partially burned, cutting down ETH’s circulating supply. But this model hinges on user engagement; fewer transactions lead to less burning, resulting in an increase of coins available.
Etherscan has highlighted an alarming statistic: the amount of ETH burnt daily has plummeted by an astonishing 95% this year. In fact, a day in April marked an all-time low for coins burnt. This raises the question: why are users flocking away from the Ethereum blockchain?
Many developers and users are opting for Layer-2 (L2) solutions like Optimism and Arbitrum. These alternatives provide significantly lower transaction costs and quicker processing. As of April 30, for example, transactions on Optimism averaged merely $0.024, while on the Ethereum mainnet, the cost soared to about $0.18—over seven times pricier. Compounding the issue are “Ethereum killers” like Solana, which have grabbed attention and users with a recent wave of interest.
The decrease in user activity is driving Ethereum’s transaction count down, resulting in the sharply low burn rate. Now, with the underwhelming demand and supply bump, questions arise regarding Ethereum’s fundamentals. Vincent Liu from Kronos Research weighed in, saying Ethereum’s fundamentals still look robust compared to other Layer-1 networks, especially with its impressive total value locked (TVL) of $368.921 billion, which keeps it at the forefront of the market.
It’s worth noting that while Ethereum is currently fifth in terms of transaction fees behind competitors like Tron and Solana, Liu points out that it still maintains solid demand and user activity. Temujin Louie, CEO of Wanchain, agreed, stating that, compared to other Layer-1s with high inflation, Ethereum’s recent updates lean towards being potentially deflationary. However, this advantage hinges on the level of on-chain activity, and they clearly need a boost to thrive amid competition.
Moving onto ETH’s pricing situation, it seems that despite the solid fundamentals, the drop in network activity creates immediate challenges. Liu added that diminished network use usually mirrors weaker ETH demand, plus increased coin issuance could hinder Ethereum’s deflationary goals, dampening price prospects. He cautioned that this combination could lead to bearish trends, especially as alternative Layer-1s surface with more appealing scalability and cheaper fees.
Kadan Stadelmann from Komodo Platform also addressed the broader market. He warned that prolonged low activity on Ethereum might push prices down, particularly under current Fed policies. Should this situation persist, ETH might stabilise around the $2,000 mark or risk deeper declines.
Currently trading at $1,834, ETH has seen a slight 1% decrease today. Yet, indications of bullish momentum persist, as the coin’s Relative Strength Index has been rising. Now at 57.68, this suggests positive trends for ETH if buying pressure builds up. Should that happen, a price breakout above $2,027 could be possible. However, should the momentum wane, prices might slip down to approximately $1,733.
In summary, Ethereum’s recent performance shows mixed signals. There are strong fundamentals, but short-term challenges threaten price stability amidst increasing competition and user shifts.
