The second largest cryptocurrency, Ethereum (ETH), has unexpectedly reversed course on its deflationary trend, raising concerns among the cryptocurrency community. Analysts are concerned about the future of the cryptocurrency due to the decline in network activity and accompanying decline in network fees.
Data from blockchain analytics firm IntoTheBlock reveals that network fees have nosedived by more than 9% this week, hitting a nine-month low at $22.1 million. As a result, the supply of ETH, Ethereum’s native token, has swelled, with fewer tokens being burned in transaction verifications than created, as reported by Ultrasound(dot)money data.
Lucas Outumuro, the head of research at IntoTheBlock, pointed out that the decrease in network fees can be attributed in part to the adoption of layer 2 solutions. This trend is likely to persist in the near term, putting pressure on ETH’s price.
“[This trend] may be putting some pressure on the second largest crypto-asset, as its supply has been growing over the past month, reverting its deflationary trend,” noted IntoTheBlock in a recent report.
Ethereum’s deflationary arc had taken shape after the Merge upgrade, which shifted the network from a proof-of-work to a proof-of-stake consensus mechanism. During periods of high demand, the network burned more tokens than it created, constraining supply and generally supporting higher prices. However, when network activity wanes, this dynamic flips, leading to inflationary concerns.
IntoTheBlock is not the only entity expressing bearish sentiments for ETH. JPMorgan analysts recently stated that Ethereum’s much-anticipated Shanghai upgrade failed to spur network activity. Transaction counts, active addresses, and total value locked on the Ethereum blockchain have all witnessed a decline since April.
Crypto services provider Matrixport is also echoing pessimism regarding ETH’s future compared to Bitcoin (BTC). They cited “shockingly low revenues” and a “lack of buzz” surrounding the next protocol update. Earlier this month, Matrixport even forecasted that ETH could potentially plummet to as low as $1,000 if the current trend persists.
While the crypto market is known for its volatility, Ethereum’s shift to an inflationary trajectory, coupled with dwindling network activity, is casting a shadow of uncertainty over its future. As the crypto community closely watches these developments, it remains to be seen how Ethereum will navigate these challenging waters.