Decreasing Network Activity Leads to Inflationary Ether, Impacting Token Price
According to intoTheBlock, the decline in network activity on Ethereum can be attributed in part to the adoption of layer 2 networks and is expected to persist in the near future.
Analysts are warning that Ether (ETH) has returned to an inflationary state due to the plummeting activity on the Ethereum network, which could negatively impact the token’s price.
Data from blockchain analytics firm IntoTheBlock reveals that network fees, which serve as a measure of usage, have dropped over 9% this week to $22.1 million, marking a nine-month low.
Consequently, the supply of ETH, Ethereum’s native token, has increased as fewer tokens are being destroyed (burned) to verify transactions compared to the number of tokens being created, as indicated by data from Ultrasound.money.
Lucas Outumuro, the research head at IntoTheBlock, stated in a Telegram chat with CoinDesk that the decrease in network fees is partly influenced by the adoption of layer 2 networks and is expected to continue in the short term.
IntoTheBlock’s report highlights that this trend may exert pressure on the second-largest cryptocurrency, as its supply has been growing over the past month, reversing the previous deflationary trend.
The narrative of Ether being deflationary emerged following the Merge, a significant network upgrade last year that shifted Ethereum from a proof-of-work consensus mechanism to proof-of-stake, thereby significantly altering the token’s supply dynamics.
During periods of high network activity, more tokens are burned than created, reducing the supply and typically considered favorable for the token’s price. Conversely, when network demand is low, this dynamic reverses.
IntoTheBlock is among the crypto observers who have highlighted bearish developments for ETH.
Earlier this week, JPMorgan analysts stated in a report that Ethereum’s highly anticipated Shanghai upgrade failed to boost network activity, as transaction counts, active addresses, and total value locked on the blockchain have all declined since April.
Matrixport, a crypto services provider, reiterated its negative outlook for ETH compared to BTC in a market update on Friday, citing “shockingly low revenues” and a “lack of buzz” surrounding the upcoming protocol update. The firm had previously forecasted that ETH could drop to as low as $1,000 if this trend persists.