Ether (ETH), the native token of the Ethereum network, has become inflationary again due to a decline in network activity. Analysts believe that this inflationary trend could put pressure on the price of ETH.
According to data from blockchain analytics firm IntoTheBlock, network fees on Ethereum dropped more than 9% this week, reaching their lowest level in nine months at $22.1 million. This decline in fees indicates a decrease in network usage and activity.
As a result of the reduced network activity, fewer ETH tokens are being destroyed (burned) to verify transactions compared to the number of new tokens being created. This data from Ultrasound.money suggests that the supply of ETH is increasing instead of decreasing, reverting its deflationary trend that emerged after last year’s Merge upgrade.
Lucas Outumuro, the research head at IntoTheBlock, explained that the decrease in network fees is partly due to the adoption of layer 2 networks, which offload some transactions from the Ethereum mainnet. He believes that this trend will likely continue in the near term.
IntoTheBlock stated in a report that the growing supply of ETH may put pressure on the second-largest cryptocurrency. When more tokens are burned than created, it is considered bullish for the price of ETH. However, when network demand is low, the dynamic flips, and an increase in supply can be bearish for the price.
This bearish sentiment towards ETH is echoed by JPMorgan analysts, who noted in a report that Ethereum’s highly anticipated Shanghai upgrade failed to boost network activity. Transaction counts, active addresses, and total value locked on the blockchain have all fallen since April.
Crypto services provider Matrixport also expressed a negative outlook for ETH compared to BTC. They cited “shockingly low revenues” and a “lack of buzz” around the next protocol update as factors contributing to their negative stance. Matrixport previously forecasted that ETH could drop to as low as $1,000 if the current trend continues.
Overall, the decline in network activity and the resulting increase in the supply of ETH are raising concerns among analysts. The inflationary trend could weigh on the price of the cryptocurrency in the coming months, highlighting the importance of monitoring network activity and adoption for Ethereum.