Ether (ETH), Ethereum’s native cryptocurrency, has shifted from its deflationary trajectory and is now experiencing inflation, a factor that could potentially influence its price downwards, according to market analysts.
There has been a noticeable decrease in Ethereum network fees, often seen as an indication of network usage. Specifically, these fees have dipped by over 9% in the past week, reaching a low of $22.1 million. This is the most significant decline seen in the last nine months, as reported by blockchain analytics company, IntoTheBlock.
This decrease in network activity has had direct consequences on the supply dynamics of ETH. Ultrasound.money data reveals that fewer ETH tokens are being burned for transaction verification than those being created. This has resulted in an overall increase in the supply of Ether.
One reason identified for the decline in network fees is the growing adoption of layer 2 solutions. Lucas Outumuro, the head of research at IntoTheBlock, communicated to CoinDesk via Telegram, anticipating that this trend of lowered network fees might persist in the near future. The implications of this could potentially exert downward pressure on ETH’s value, especially given the recent increase in its supply.
Ethereum’s shift to a deflationary model was a significant development after the Merge, an upgrade that marked Ethereum’s transition from the energy-intensive proof-of-work consensus algorithm to the more environmentally friendly proof-of-stake. This transition fundamentally changed how Ethereum’s supply was managed. During high-demand periods, more tokens are burned than minted, causing a deflationary effect which is generally seen as a positive factor for price. But, in scenarios where network demand diminishes, this dynamic reverses.
Furthermore, IntoTheBlock is not the sole voice echoing concerns regarding Ethereum’s current trend. JPMorgan’s analysts have also noted that despite Ethereum’s anticipated Shanghai upgrade, the network’s activity hasn’t seen a significant boost. Key indicators like transaction count, active addresses, and total value secured on the Ethereum blockchain have all decreased since April.
Matrixport, a cryptocurrency services provider, has also weighed in on the issue. The firm highlighted concerns about Ethereum’s low revenues and lack of enthusiasm regarding forthcoming protocol updates. They even made a projection earlier this month, suggesting that if this trend persisted, ETH’s price could tumble to a value as low as $1,000.
At the time of this report, Ether was trading at $1,591 and had seen its lowest value in 14 months when compared to Bitcoin (BTC).
