Ethereum Network Slows Down and So Does the Price: What Will Happen Next with ETH?

In the past few months, Ethereum has experienced a significant decline in user activity on its blockchain. This slowdown has reduced the burn rate of the network—a mechanism that helps decrease the supply of ETH over time. With the lower number of tokens burned, the circulating supply of ETH has increased, putting inflationary pressure on the asset. As a result, this currency has struggled to maintain a stable price above $2,000 in recent months. The low burn rate is equivalent to more money being circulated. According to Ultrasoundmoney, in just the past month, 72,927 ETH, worth 134 million dollars at current market prices, has been added to the circulating supply of ETH. At the time the press reported, this figure was 120,730,199 ETH, significantly higher than the level before the merger.

The increase in the supply of ETH is driven by the fall in user activity on the Ethereum network, reducing the rate of burn. Ethereum's burn mechanism, introduced through EIP-1559, destroys a portion of transaction fees to reduce the circulating supply of ETH. However, this mechanism is directly related to network usage. Therefore, when fewer transactions occur like this, less ETH is burned, leading to a sudden increase in ETH supply. According to Etherscan, the daily amount of ETH burned has fallen by 95% as of now. In fact, the network recently recorded the lowest amount of coins burned in a single day on April 20.

Why are Ethereum users leaving the Blockchain? Many users and developers are moving from Ethereum to Layer 2 solutions (L2) such as Optimism and Arbitrum. These networks offer significantly lower transaction fees and faster execution, reducing user activity on the main Ethereum network. For example, as of April 30, the average transaction fee on the Optimism mainnet is only $0.024. In contrast, completing a transaction directly on Ethereum costs users an average of $0.18 on the same day, more than seven times as much.

Moreover, thanks to the recent meme coin craze, "Ethereum killers" like Solana have garnered significant attention over the past few months, attracting users away from L1. These trends together have led to a fall in the number of transactions on Ethereum, resulting in a low burn rate for the network. What are the basic factors of Ethereum? The demand from Ethereum users has fallen, and the supply of ETH has increased, raising important questions about the underlying strength of this currency. When asked how Ethereum currently compares to other Layer 1 networks in the context of the overall weakening market, Vincent Liu, Investment Director at Kronos Research, shared his perspective. Liu stated: "The fundamental factors of Ethereum remain strong compared to other Layer 1 cryptocurrencies, especially when you consider the total value locked (TVL) is $368.921 billion, placing it at the top of the rankings." Although 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 Louie, CEO of Wanchain, shares a similar perspective. When speaking with BeInCrypto, Louie noted: "Compared to other Layer 1s, the fundamentals remain Ethereum's strength. Unlike many other Layer 1s that have strong inflation as part of their design, Ethereum's post-merger architecture allows it to have deflationary capabilities. However, the benefits of EIP-1559 depend on on-chain activity. Nevertheless, this is a structural advantage over most other competing Layer 1s." While the activity increases on Layer 2 solutions (L2) and the "Ethereum killer" like Solana may have contributed to the fall in user demand for Ethereum, Louie believes that the L1 network "remains the leading network in terms of decentralization and has an almost unparalleled track record, continuing to secure its position in the market." How is the price of ETH? Even with strong fundamental factors, the decline in activity on Ethereum still poses challenges for ETH in the short to medium term. Commenting on this, Liu explained that lower network activity typically signals weaker demand for ETH. At the same time, increasing the issuance of money on the network undermines the deflationary model of Ethereum, which is designed to support price increases. Liu warned: "This combination could lead to a price fall, especially as investors seek better scaling Layer 1 alternatives with lower fees." Kadan Stadelmann, the Chief Technology Officer of Komodo Platform, also emphasized the role of macroeconomic factors: "If Ethereum experiences a prolonged decline in usage, the price could fall significantly depending on the extent of the usage decline, especially if the Fed continues its quantitative tightening policy compared to quantitative easing. In the short term, this means the price could drop to the $2,000 range. However, if this trend continues, then Ethereum may find itself in a prolonged consolidation phase or a complete downtrend." ETH aims for a breakthrough target of $2,000 as the RSI strengthens. ETH is currently trading at $1,834, recording a price fall of 1% over the past day. Despite the brief decline, the upward pressure in the spot market for this cryptocurrency continues to rise, as indicated by the increasing relative strength index (RSI) for this coin. At the time of the press report, this momentum indicator was at 57.68. ETH's RSI signals bullish conditions are increasing. This suggests that this altcoin is likely to rise in price if buying pressure increases.

In this scenario, its price could exceed $2,027. However, if buying pressure loses momentum, the price of ETH could fall to $1,733.