Sluggish Ethereum Network Leads to Drop in ETH Value: What Happens to Ether Next?
Revised Output
Ethereum's Slump: Lower Burn Rate and Soaring Supply
Ethereum's blockchain has been experiencing a marked slump in user activity, leading to a reduced burn rate. This shift has a direct impact on the coin's supply, causing an inflationary surge.
With fewer tokens getting burned, Ethereum's circulating supply has seen a surge, putting pressure on its price. As a result, it's struggled to maintain stability above the $2,000 mark in recent times.
Burning Fewer Coins Equals More for Circulation
According to Ultrasoundmoney, over a million dollars worth of ETH has been added to the circulating supply in the past month alone[2]. This brings Ethereum's supply to 120 million-plus, significantly higher than its pre-merge levels.
This influx in ETH's supply is attributable to reduced user activity on the Ethereum network, which, in turn, lowers the burn rate. Ethereum's burn mechanism, initiated via EIP-1559, eliminates a portion of transaction fees to decrease the circulating supply of ETH.
However, this process is intrinsically linked to network usage. So, when transactions drop, less ETH gets burned, resulting in a spike in supply.
As per Etherscan, the daily amount of ETH burnt has plummeted by 95% year-to-date. In fact, the network recently recorded its lowest amount of coins burnt in a single day on April 20.
Why are Ethereum Users AWOL?
Many users and developers are deserting Ethereum in favor of Layer-2 (L2) solutions like Optimism and Arbitrum. These networks offer significantly lower transaction fees and prompt execution, reducing user activity on Ethereum's mainnet.
For instance, as of April 30, the average transaction fee on Optimism's mainnet was a mere $0.024[6]. By contrast, executing a transaction directly on Ethereum cost users an average of $0.18 on the same day, which is over seven times more expensive.
Furthermore, the popularity of 'Ethereum killers,' like Solana, has skyrocketed over the past few months, luring users away from the L1[7].
This combination has led to a decline in Ethereum's transaction count, consequently affecting its burn rate.
Ethereum's Fundamentals: still a contender?
The drop in Ethereum's user demand and the subsequent rise in ETH's supply have sparked questions about the robustness of its fundamentals[8].
Vincent Liu, Kronos Research's CIO, opined that while Ethereum ranks fifth in 24-hour fees, it still demonstrates significant demand and usage. He attributes this to the network's staggering total value locked (TVL) of over $368 billion, placing it atop the leaderboard.
Temujin Louie, Wanchain's CEO, shares a similar perspective. He notes that Ethereum's post-merge architecture potentially renders it deflationary, offering an edge over most competing Layer-1s[9].
Although increased activity across L2 solutions and competition from networks like Solana may have contributed to declining user engagement on Ethereum, Louie maintains that the L1 network retains its standing as a leader in decentralization with an unmatched track record.
ETH Price: Challenges Ahead
Despite strong fundamentals, Ethereum faces challenges in the short- to mid-term due to reduced network activity[8]. Lower user demand generally signals weaker demand for ETH, undermining its deflationary model, designed to bolster price appreciation.
The combination of weakened demand and increased coin issuance could lead to bearish price movements. This is particularly true as investors seek out competitive Layer-1s offering superior scalability and lower fees.
A Look at the RSI Trend
Currently, ETH trades at $1,834, experiencing a 1% daily dip in value. Despite this minor setback, the bullish sentiment in ETH spot markets remains strong and reflected in the coin's climbing Relative Strength Index (RSI)[10].
As of now, ETH's RSI reading stands at 57.68. This indicates increasing bullish conditions, suggesting that the altcoin could rally if buying pressure intensifies. In such a scenario, its price might breach the $2,027 threshold.
However, if buying pressure eases, ETH's value could plummet to $1,733[10].
- The reduced burn rate on Ethereum's blockchain, triggered by decreased user activity, has expanded the circulating supply of ETH tokens.
- The increased ETH supply, due to less coin burning, has put pressure on Ethereum's price, causing it to struggle in maintaining stability above the $2,000 mark.
- Over a million dollars worth of ETH has been added to the circulating supply in the past month, pushing its supply above 120 million, significantly more than its pre-merge levels.
- Lower user activity on the Ethereum network, leading to less coin burning, has resulted in a spike in ETH's supply.
- The network's reduced burn rate is intrinsically linked to network usage, so when transactions drop, fewer ETH coins are burned, leading to an increased supply.
- Many users and developers are migrating to Layer-2 (L2) solutions like Optimism and Arbitrum, causing a decline in Ethereum's transaction count and affecting its burn rate.
- The average transaction fee on Optimism's mainnet is significantly lower than that on Ethereum's, contributing to reduced user activity on Ethereum's mainnet.
- The popularity of 'Ethereum killers,' such as Solana, has surged, pulling users away from Ethereum's L1 network.
- The decline in Ethereum's user activity, coupled with the influx of users to networks like Solana, has raised questions about the strength of its fundamentals.
- Despite the challenges posed by reduced network activity, Ethereum's strong total value locked (TVL) of over $368 billion keeps it atop the leaderboard, demonstrating potential for deflation and setting it apart from competing Layer-1s.
