Over the past few months, Ethereum has experienced a significant decrease in user activity on its blockchain. This slowdown has reduced the network's burn rate — a mechanism that helps reduce the supply of ETH over time.
With fewer tokens being burned, the circulating supply of ETH has increased, creating inflationary pressure on the asset. As a result, the token has struggled to maintain a stable price above the $2,000 level in recent months.
Low Burn Rate Means More Tokens in Circulation
According to Ultrasoundmoney, 72,927 ETH, worth $134 million at current market prices, was added to the circulating supply of ETH in just the last month.
At the time of publication, this stands at 120,730,199 ETH, significantly exceeding pre-merge levels. This increase in ETH supply is driven by the decline in user activity on the Ethereum network, which reduces its burn rate. The Ethereum burn mechanism, implemented through EIP-1559, destroys a portion of transaction fees to reduce the circulating supply of ETH.
However, this mechanism is directly tied to network usage. Therefore, when fewer transactions occur, as in this case, less ETH is burned, leading to an increase in the supply of ETH.
According to Etherscan, the daily amount of burned ETH has decreased by 95% since the beginning of the year. In fact, the network recently recorded the lowest number of burned tokens in a single day on April 20. Why are Ethereum users leaving the blockchain?
Many users and developers are migrating from Ethereum to Layer-2 (L2) solutions such as Optimism and Arbitrum. These networks offer significantly lower transaction fees and faster execution, reducing user activity on the main Ethereum network.
For instance, as of April 30, the average transaction fee on the Optimism mainnet was only $0.024. In comparison, completing a transaction directly on Ethereum cost users an average of $0.18 that same day, which is over seven times more expensive. Moreover, due to the recent hype around meme coins, 'Ethereum killers' like Solana have gained significant popularity in recent months, diverting users away from L1.
Together, these trends have led to a decline in the number of transactions on Ethereum, and thus, a low burn rate for the network.
How does Ethereum's fundamentals compare to others?
The declining user demand for Ethereum and the continued increase in ETH supply have raised important questions regarding the strength of its fundamental indicators.
When asked how Ethereum currently compares to other Layer-1 (L1) networks amidst the overall market weakness, Vincent Liu, Chief Investment Officer of Kronos Research, shared his thoughts.
'Fundamental indicators of Ethereum remain strong compared to other Layer-1s, especially when considering its total value locked (TVL) of $368.921 billion, which puts it at the top of the rankings,' Liu said.
While Liu acknowledged that Ethereum ranks fifth in 24-hour fees, behind Tron, Solana, HyperLiquid, Bitcoin, and BNB Chain, he emphasized that the network still 'demonstrates significant demand and usage.'
Temujin Louis, CEO of Wanchain, shares a similar viewpoint. During a conversation with BeInCrypto, Louis noted:
'Compared to other Layer-1s, the fundamental indicators remain a strength of Ethereum. Unlike many Layer-1s with aggressive inflation as part of their design, Ethereum's architecture post-merge makes it potentially deflationary. However, the benefits of EIP-1559 depend on on-chain activity. Nevertheless, this is a structural advantage over most competing Layer-1s.'
While the increase in activity on Layer-2 (L2) solutions and 'Ethereum killers' like Solana may have contributed to a decrease in user demand on Ethereum itself, Louis believes that the L1 network 'remains a leader in decentralization and has an almost unparalleled experience that continues to secure its place in the market.'
What about the price of ETH?
Even with strong fundamental indicators, the decline in activity on Ethereum poses challenges for ETH in the short and medium term. Commenting on this, Liu explained that lower network activity usually signals weaker demand for ETH.
At the same time, the increase in token issuance on the network undermines Ethereum's deflationary model, which was designed to support price growth.
'This combination could lead to bearish price movements,' Liu warned, 'especially as investors turn their attention to alternative Layer-1s that offer better scalability and lower fees.'
Kadan Stadelmann, Chief Technology Officer (CTO) of the Komodo platform, also emphasized the role of macroeconomic factors:
'If Ethereum experiences a prolonged decrease in usage, the price could significantly drop depending on how much usage declines, especially if the US Federal Reserve continues its quantitative tightening policy compared to quantitative easing. In the short term, this could mean a price drop to the $2,000 range. However, if the trend continues, Ethereum could find itself in a prolonged consolidation period or even in a clear downward trend.'
ETH targets a breakout at $2,000 amid a strengthening RSI indicator.
At present, ETH is trading at $1,834, marking a price decrease of 1% over the last day. Despite a short-term pullback, bullish pressure in the token's spot markets continues to intensify, as reflected in the rising relative strength index (RSI) of the token.
At the time of publication, this momentum indicator stands at 57.68. ETH's RSI metrics signal rising bullish conditions. This suggests that the altcoin has room for growth if buying pressure increases.
In this scenario, its price could exceed $2,027. However, if buying pressure loses momentum, the value of ETH could drop to $1,733.
