The Ethereum community has been navigating choppy waters over the past few months, with its native cryptocurrency, ether (ETH), plummeting to values reminiscent of 2020. Even more worryingly, it is lagging behind bitcoin (BTC) and other high cap alternative coins. The current market trajectory seems to suggest that this downturn may persist.
A recent report by market analytics giant CryptoQuant indicates that reduced network activity is a significant factor fueling Ethereum’s depreciation. This sustained dip in activity has led to an alarming inflation rate for ETH, causing the cryptocurrency to hemorrhage value over time.
Ethereum’s network activity has been on a steady decline since the start of the year. This is evidenced by a decreasing number of active addresses and a slump in average fees per transaction and per block, hitting all-time lows. These factors have contributed to the lowest ETH burn rate since the Merge.
Historically, Ethereum implemented a burn mechanism to ensure that the asset remained deflationary over time. This involved a portion of ETH being removed from circulation, sourced from Ethereum gas fees, and permanently erased from the supply. The Merge, Ethereum’s transition from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism, was designed to strengthen this mechanism by ensuring more ETH was burned than minted.
However, the post-Merge landscape has not followed this script. Following the Dencun upgrade last year, which introduced blobs and decreased transaction fees, less ETH has been burned with more being minted. This has reversed Ethereum’s trajectory, making it inflationary once more. With the ETH burn rate at its lowest since the Merge, inflationary pressures on the cryptocurrency have intensified.
CryptoQuant analyst EgyHash, who prefers to remain pseudonymous, attributes Ethereum’s recent underperformance largely to its diminished network activity. EgyHash explains, “Declining active addresses and reduced transaction fees, coupled with a low burn rate post-Dencun upgrade and a continuous high inflation rate, continue to exert downward pressure on the asset’s value.”
However, EgyHash also suggests that Ethereum could potentially recover if there is an upswing in the network’s activity. This would require an increase in active addresses, leading to higher transaction fees and more ETH being burned.
At the time of writing, ETH was worth $1,790, marking a 4% daily decrease according to data from CoinMarketCap. The asset was adversely impacted by the recent announcement about the implementation of trade tariffs in the United States. Over the past month, ether has shed 16% of its value and has declined more than 60% from its peak of just over $4,000 in this cycle.
