Slackening Pace on Ethereum Network Causes Drop in ETH Value: Predicting the Future for Ether
Low User Activity Floods Ethereum With Tokens
Hey there! Let's dive into the current situation with Ethereum and its blockchain. Over the past few months, this popular crypto platform has faced a significant drop in user activity, leading to an alarming increase in its circulating supply.
This reduced network activity has slowed down the burn rate—a mechanism designed to decrease Ethereum's ETH supply over time. With fewer tokens being burned, the circulating supply has skyrocketed, causing inflationary pressure on the coin. As a result, Ethereum has struggled to maintain its price above the $2,000 mark in recent times.
More ETH, Less Burn
According to reports from Ultrasoundmoney, over 72,000 ETH, worth approximately $134 million at current market prices, have entered the circulating supply in just one month. At this moment, the circulating ETH supply stands at a whopping 120,730,199 tokens, significantly surpassing pre-merge levels.
This increase in ETH's supply is directly related to the drop in user activity on the Ethereum network, inevitably leading to a lower burn rate. The burn mechanism introduced through EIP-1559, which destroys a portion of transaction fees to reduce the circulating ETH supply, is dependent on network usage. When transactions decrease, less ETH is burned, causing the supply to spike.
As per Etherscan, the daily amount of ETH burned has plummeted by 95% year-to-date. In fact, the network recently logged its lowest single-day burn rate on April 20.
Leaving Ethereum for Layer 2 Greener Pastures
Many users and developers are migrating from Ethereum to Layer-2 (L2) solutions like Optimism and Arbitrum, in search of lower transaction fees and faster execution. These networks offer a significant relief from the higher fees and slower speeds on Ethereum's mainnet.
For instance, as of April 30, the average transaction fee on Optimism's mainnet only amounted to $0.024. On the other hand, completing a transaction on Ethereum's mainnet cost users an average of $0.18 on the same day, a hefty seven times more expensive.
The recent meme coin mania has also boosted the popularity of "Ethereum killers," such as Solana, further driving users away from the L1.
Given these trends, it's no wonder that Ethereum's transaction count has seen a decline, leading to the network's low burn rate.
Is Ethereum's Fundamental Strength in Question?
The falling demand for Ethereum and the subsequent rise in ETH's supply have raised eyebrows about the coin's fundamental strength. Vincent Liu, Chief Investment Officer at Kronos Research, opined that Ethereum's fundamentals continue to stand strong compared to other Layer-1 networks, particularly when considering its total value locked (TVL) of $368.921 billion.
While Liu acknowledges that Ethereum ranks fifth in 24-hour fees, he emphasizes that the network still demonstrates significant demand and usage. Temujin Louie, CEO of Wanchain, shares a similar view, stating that Ethereum's strong fundamentals remain its key advantage over most competing Layer-1 (L1) networks.
The Future Outlook for ETH: A Bearish Sentiment
Even with these strong fundamentals, decreased activity on Ethereum may pose challenges in the short- to mid-term. Lower network activity generally translates to weaker demand for ETH. Moreover, increased coin issuance on the network undermines Ethereum's deflationary model, which was designed to support price appreciation.
"This combination could lead to bearish price movements, especially as investors look to alternative Layer-1s offering better scalability and lower fees," warned Liu.
Kadan Stadelmann, CTO of Komodo Platform, highlighted the role of macroeconomic factors in this situation, stating that Ethereum might experience a considerable price drop if the Fed continues its policy of quantitative tightening compared to quantitative easing.
The $2,000 Resistance Persists
At the time of writing, ETH trades at $1,834 and has experienced a 1% price dip over the past day. Despite the short-term dip, bullish pressure in the coin's markets continues to intensify, as indicated by the coin's rising Relative Strength Index (RSI).
If buying pressure escalates, ETH could break through the $2,027 resistance level. However, if momentum wanes, the coin's value might fall to $1,733.
So, that's the current state of play with Ethereum! Remember, this is not financial advice, always do your own research, and be prepared to lose all the money you invest, especially when it comes to high-risk investments like cryptocurrencies. Stay cryptowise! 🕶️🌛📈🚀📊💸⛓️🔩⚔️👾☄️⚽️⚒️🚀📊💸📊.
- Despite the drop in user activity, Ethereum's chief investment officer, Vincent Liu, maintains that the coin's fundamentals are strong compared to other Layer-1 networks in terms of total value locked (TVL).
- The lowered network activity on Ethereum has led to a reduced burning of tokens due to the EIP-1559 mechanism, causing a spike in the circulating ETH supply.
- Many users and developers are migrating from Ethereum to Layer-2 solutions like Optimism and Arbitrum, seeking lower transaction fees and faster execution.
- Bitcoin and other altcoins have seen increased trading activity, causing some investors to consider them over Ethereum due to Ethereum's low user activity and scalability issues.
- Whales, large investors with significant crypto holdings, could potentially take advantage of Ethereum's inexpensive tokens and purchase them en masse, further driving up the coin's supply and potentially impacting its price.
- In light of these challenges, some analysts warn that Ethereum could experience bearish price movements as investors seek out Layer-1 networks with better scalability and lower fees.
