Challenges for the Ethereum Ecosystem
The past few months have been difficult for the Ethereum ecosystem, with Ether (ETH) dropping to levels not seen since 2020. Compared to Bitcoin (BTC) and several major CAP AltCoins, ETH’s performance has been notably lacking. Worse still, the bleeding does not seem to be stopping anytime soon.
Decrease in Network Activity
According to reports from the market analysis platform CryptoQuant, one of the main reasons Ethereum has been losing value is the reduction in network activity. This sustained decline in activity has led to a high inflation rate for ETH, causing the cryptocurrency to lose value over time.
The number of active addresses on Ethereum has been steadily decreasing since the beginning of this year. Additionally, the average fees per transaction and per block have directly dropped to record lows. Due to low fees and fewer active addresses, the ETH burn rate has fallen to its lowest level since the Merge.
Recall that Ethereum introduced a burn mechanism to remove a portion of ETH from circulation, ensuring that the asset maintains its value over time. These coins are taken from Ethereum’s gas fees and permanently removed from the supply.
The Merge marked Ethereum’s transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism, aimed at enhancing this concept by ensuring that less ETH is created than is burned.
However, following last year’s Dencun upgrade, the introduction of stipulations and reduced transaction fees has resulted in less ETH being burned and more being minted. This has caused ETH to once again become inflationary. With the ETH burn rate hovering at its lowest level since the Merge, inflationary pressures on the cryptocurrency have intensified.
“The recent poor performance of Ethereum can be primarily attributed to reduced network activity, as evidenced by declining active addresses and decreasing transaction fees. These factors, along with the low burn rate post-Dencun upgrade and persistent high inflation rates, continue to exert downward pressure on asset value,” stated an analyst from Egyhash.
ETH Falls 4% Daily
Additionally, Egyhash noted that Ethereum could face potential recovery if network activity improves, which would increase active addresses, leading to higher transaction fees and more ETH being burned.
At the time of writing, ETH is valued at $1,790, reflecting a 4% decrease according to data from CoinMarketCap. Notably, the asset has been negatively impacted by announcements confirming the implementation of trade tariffs in the United States.
Furthermore, in the past month, the value of Ether has lost 16%, and since the peak of this cycle above $4,000, the value of Ether has dropped by over 60%.
