In recent months, Ethereum has seen a notable drop in activity on its blockchain, resulting in a decrease in its burn rate which typically helps reduce the supply of ETH over time. With fewer tokens being burned, more ETH has entered circulation, leading to inflationary pressure on the cryptocurrency. As a consequence, maintaining a stable price above $2,000 has been challenging for Ethereum.
Ultrasoundmoney reports that within the last month, an additional 72,927 ETH worth $134 million has been added to the circulating supply of Ethereum, bringing the total ETH supply to 120,730,199, well above its previous levels.
This surge in ETH supply is a result of reduced user activity on the Ethereum network, which has lowered the burn rate. The burn mechanism, introduced through EIP-1559, operates by destroying a portion of transaction fees to reduce the circulating supply of ETH. However, when network usage decreases, less ETH is burned, leading to an increase in the supply of ETH.
Etherscan data shows a significant 95% drop in the daily amount of ETH burned year-to-date, with the network recording its lowest daily burn on April 20.
Several reasons contribute to the decline in Ethereum's user base, with users and developers shifting to Layer-2 solutions like Optimism and Arbitrum due to lower transaction fees and faster processing times. These alternatives offer more cost-effective transactions compared to Ethereum's mainnet. Additionally, the rise of "Ethereum killers" like Solana has attracted users away from Ethereum, impacting its transaction count and burn rate.
Despite these challenges, Ethereum's fundamentals are still considered strong compared to other Layer-1 networks, with a notable Total Value Locked (TVL) and significant demand. While Ethereum may face short- to mid-term difficulties due to reduced activity affecting ETH demand and its deflationary model, analysts suggest that the network's structural advantages and decentralization make it a leader in the market. However, ongoing decreased utilization on Ethereum could lead to a prolonged consolidation phase or downtrend in price.
Currently trading at $1,834, Ethereum may experience a breakout above $2,000 supported by a strengthening RSI indicating bullish conditions, but a loss of buying pressure could see its value drop to $1,733.