In recent months, Ethereum has experienced a significant decline in user activity on its blockchain. This slowdown has reduced the network's burn rate—a mechanism that helps reduce ETH supply over time.
With fewer tokens being burned, the circulating supply of ETH has increased, putting inflationary pressure on the asset. As a result, this coin has struggled to maintain a stable price above $2,000 in recent months.
Low burn rates equate to more currency in circulation
According to Ultrasoundmoney, in just the past month, 72,927 ETH, worth $134 million at current market prices, has been added to the circulating supply of ETH.
At the time of writing, this figure is 120,730,199 ETH, significantly higher than the pre-merge level.
This increase in ETH supply is driven by a decrease in user activity on the Ethereum network, reducing the burn rate. Ethereum's burn mechanism, introduced through EIP-1559, destroys a portion of transaction fees to reduce the circulating supply of ETH.
However, this mechanism is directly related to network usage. Therefore, when fewer transactions occur, less ETH is burned, leading to a spike in ETH supply.
According to Etherscan, the daily amount of ETH burned has decreased by 95% to date. In fact, the network recently recorded the lowest amount of burned coins in a day on April 20.
Why are Ethereum users leaving the Blockchain?
Many users and developers are moving from Ethereum to Layer 2 (L2) solutions like Optimism and Arbitrum. These networks offer significantly lower transaction fees and faster execution, reducing user activity on Ethereum's main network.
For example, as of April 30, the average transaction fee on Optimism's main network was only $0.024. In contrast, completing a transaction directly on Ethereum cost users an average of $0.18 on the same day, seven times more expensive.
Moreover, thanks to the recent meme coin craze, Ethereum 'killers' like Solana have garnered significant attention in recent months, attracting users away from L1. These trends together have led to a decline in the number of transactions on Ethereum, resulting in low burn rates for the network.
How are the fundamentals of Ethereum?
The declining demand from Ethereum users and the subsequent increase in ETH supply have raised significant questions about the fundamental strength of this currency.
When asked how Ethereum currently compares to other Layer 1 (L1) networks in the context of the overall weakening market, Vincent Liu, investment director at Kronos Research, shared his views.
Liu stated: “The fundamentals of Ethereum remain strong compared to other Layer 1 cryptocurrencies, especially when considering the total value locked (TVL) of $368.921 billion, placing it at the top of the rankings.”
Although Liu acknowledges that Ethereum ranks fifth in 24-hour fees, behind Tron, Solana, HyperLiquid, Bitcoin, and BNB Chain. He emphasizes that the network still 'demonstrates significant demand and usage'.
Temujin Louie, CEO of Wanchain, shared a similar view. Speaking with BeInCrypto, Louie noted:
“Compared to other Layer 1s, the fundamentals remain Ethereum's strength. Unlike many other Layer 1s that have strong inflation as part of their design, Ethereum's post-merge architecture allows it to be deflationary. However, the benefits of EIP-1559 depend on on-chain activity. Nevertheless, this is a structural advantage over most competing Layer 1s.”
While increasing activity on Layer 2 (L2) solutions and Ethereum 'killers' like Solana may have contributed to reduced user demand for Ethereum, Louie believes that the L1 network 'remains the leading network in terms of decentralization and has an almost unparalleled track record, continuing to secure its position in the market'.
What is the price of ETH?
Even with strong fundamentals, declining activity on Ethereum still poses challenges for ETH in the short to medium term. Commenting on this, Liu explained that lower network activity often signals weaker demand for ETH.
At the same time, the increased issuance of currency on the network undermines Ethereum's deflationary model, which is designed to support price increases.
Liu warns: “This combination could lead to reduced price volatility, especially as investors seek Layer 1 alternatives with better scalability and lower fees.”
Kadan Stadelmann, the CTO of Komodo Platform, also emphasized the role of macroeconomic factors:
“If Ethereum experiences a prolonged decline in usage, prices could drop significantly depending on the degree of reduced usage, especially if the Fed continues its quantitative tightening policy against quantitative easing. In the short term, this means prices could fall into the $2,000 range. However, if this trend continues, Ethereum could find itself in a prolonged consolidation phase or an outright downtrend.”
ETH is aiming for a breakthrough target of $2,000 in the context of a strengthening RSI
ETH is currently trading at $1,834, recording a 1% price decrease over the past day. Despite the brief decline, bullish pressure on this coin's spot market continues to rise, as reflected in the coin's increasing Relative Strength Index (RSI).
At the time of writing, this momentum indicator is at 57.68. The RSI of ETH indicates that bullish conditions are increasing. This suggests that this altcoin has the potential to rise if buying pressure increases.
In this scenario, its price could exceed $2,027. However, if buying pressure loses momentum, the price of ETH could drop to $1,733.