Over the past few months, Ethereum has experienced a significant decline in user activity on the blockchain. This slowdown reduced the burn rate in the network. This is a mechanism that helps reduce the supply of ETH over time.
Less tokens burn, the circulating supply of ETH increases, putting inflationary pressure on assets. As a result, Coin has struggled to maintain a stable price of over $2,000 in recent months.
The low burn rate equals many of the coins in circulation
According to UltrasoundMoney, 72,927 ETH, valued at current market prices at $134 million, has been added to ETH’s distribution supply in the past month alone.
At the time of pressing, this is located at 120,730,199 ETH, significantly exceeding the pre-merge level.
Circulating supply of Ethereum. Source: UltrAsoundMoney
This increase in ETH supply is driven by a decline in user activity on the Ethereum Network, resulting in a lower fire rate. The Ethereum burn mechanism introduced through EIP-1559 destroys some of the trading fees to reduce the circulation supply of ETH.
However, this mechanism is directly linked to network use. Therefore, when such transactions are low, when ETH is burned, the supply of ETH will skyrocket.
According to Etherscan, daily burning volumes have fallen by 95% since the start of the year. In fact, the network recently recorded the lowest amount of coins burned in one day on April 20th.
The ether was burning every day. Source: Etherscan
Why do Ethereum users leave the blockchain?
Many users and developers are moving from Ethereum such as Optimism and arbitrum to Layer 2 (L2) solutions. These networks significantly reduce transaction fees, provide faster execution, and reduce user activity on Ethereum’s mainnet.
For example, as of April 30, the average trading fee for optimistic Mainnets was only $0.024. In contrast, completing a direct transaction on Ethereum costs users an average of $0.18 on the same day, which is more than seven times more expensive.
Average transaction fees for optimism. Source: Dune Analytics
Plus, thanks to recent Meme Coin Mania, “Ethereum Killers” such as Solana have gained considerable traction in the past few months, pulling users away from the L1.
Together, these trends led to a decrease in transaction counts for Ethereum, thus resulting in a low burn rate for the network.
How do Ethereum fundamentals stack up?
The decline in user demand for Ethereum and subsequent increase in ETH supply have raised important questions about its fundamental strength.
Vincent Li, chief investment officer at Kronos Research, offered his perspective when asked what Ethereum is currently comparing it to other Layer 1 (L1) networks amid the broader market weakness.
“The basics of Ethereum remain strong compared to other Layer 1, especially if you consider the $36.892.1 billion total (TVL) to be at the top of the leaderboard,” Li said.
Although Liu admitted that he ranks fifth in 24-hour expenses behind Tron, Solana, Hyperquid, Bitcoin and BNB chains. He emphasized that the network still “indicating important demand and usage.”
Temujin Louie, CEO of Wanchain, shares a similar perspective. While talking to Beincrypto, Louie pointed out:
“Compared to the other Layer 1, the fundamentals remain Ethereum’s strength. Unlike many Layer 1, which have aggressive inflation as part of the design, Ethereum’s multi-global architecture potentially deflates it.
While the increase in activity through Layer-2 (L2) solutions and “Ethereum Killers” like Solana may have contributed to a decrease in user demand for Ethereum itself, Louie believes the L1 network is “a leader in decentralization and has a near-decommissioned track record of continuing to secure its position in the market.”
What about ETH prices?
Even with a strong foundation, slower activity at Ethereum poses ETH challenges in the short to medium term. Commenting on this, Liu explained that a decline in network activity indicates a weaker demand for ETH in general.
At the same time, an increase in coin issuance across the network undermines Ethereum’s deflationary model, which is designed to support price increases.
“This combination could lead to a bearish price movement,” Liu warned. “In particular, investors look at alternative layer 1, offering better scalability and lower rates.”
Kadan Stadelmann, CTO of Komodo Platform, also highlighted the role of macroeconomic factors.
“Usage could significantly lower prices depending on Ethereum if usage is expanded, especially if the Fed continues its quantitative tightening policy compared to quantitative easing. In the short term, prices could drop to the $2,000 range.
ETH bolsters RSI, a $2,000 breakout
ETH is currently trading at $1,834, focusing on a 1% price drop in the past day. Despite the short pullback, bullish pressure in the Coin’s spot market continues to be reflected and strengthened in the Coin’s Climbing Relative Strength Index (RSI).
At press, this momentum indicator is 57.68. RSI measurements of ETH indicate a growing bullish state. This indicates that AltCoin has room for upward movement as purchase pressure increases.
In this scenario, its price could be over $2,027.
ETH price analysis. Source: TradingView
However, if you lose momentum when purchasing pressure, the value of your ETH can drop to $1,733.