Ethereum (ETH), the world’s second-largest cryptocurrency, is undergoing an unexpected transformation toward inflationary territory. This shift comes as Ethereum’s network activity experiences a sharp decline, largely attributed to the rising popularity of layer 2 solutions—a trend experts believe will persist in the foreseeable future, as per insights from intoTheBlock.
According to data from blockchain analytics firm IntoTheBlock, network fees—a dependable metric for measuring Ethereum’s usage—have taken a nosedive, plunging by over 9% in the past week. The fees now stand at a nine-month low, clocking in at $22.1 million.
Consequently, the supply of ETH, Ethereum’s native digital asset, has begun to surge. There are now fewer tokens being “burned” during the transaction validation process compared to the number of new tokens being minted, a fascinating trend corroborated by data from Ultrasound.money.
This decline in network fees is largely driven by the growing adoption of layer 2 scaling solutions—a trend that experts expect to persist in the immediate future. Lucas Outumuro, the head of research at IntoTheBlock, underscored this viewpoint during a recent conversation with CoinDesk.
In a recent report, IntoTheBlock stated, “[This trend] may exert some pressure on the second largest crypto-asset, as its supply has been steadily growing over the past month, reversing its previous deflationary trajectory.”
The narrative surrounding Ether as a deflationary asset took root following the Merge upgrade last year. This monumental upgrade marked Ethereum’s transition from a proof-of-work consensus mechanism to a proof-of-stake system, ushering in significant changes to the cryptocurrency’s supply dynamics.
Traditionally, during periods of high demand, Ethereum’s network tended to destroy more tokens than it created, resulting in a decrease in supply—a trend that typically bodes well for the token’s price. However, the dynamics shift when network demand diminishes.
IntoTheBlock joins a growing chorus of cryptocurrency industry observers who are expressing concerns about Ethereum’s recent performance.
JPMorgan analysts recently released a report highlighting that Ethereum’s much-anticipated Shanghai upgrade failed to rekindle network activity. Metrics such as transaction counts, active addresses, and the total value locked on the blockchain have all shown declines since April.
Adding to the skepticism, crypto services provider Matrixport echoed this sentiment in a recent market update, citing “remarkably low revenues” and a “lack of enthusiasm” surrounding the forthcoming protocol update for Ethereum. Earlier this month, the firm even predicted that ETH could plummet to as low as $1,000 if the current trend persists. As of the latest data, ETH is trading at $1,591 and has hit a 14-month low against BTC
