Ethereum's Circulating Supply Rises 0.06% as User Activity Declines

Over the past few months, the Ethereum network has experienced a significant decline in user activity, which has led to a reduction in its burn rate. This mechanism, introduced through EIP-1559, is designed to decrease the circulating supply of ETH over time by destroying a portion of transaction fees. However, with fewer transactions occurring, less ETH is being burned, resulting in an increase in the coin's circulating supply.

According to data, 72,927 ETH, valued at $134 million at current market prices, have been added to ETH’s circulating supply in the past month alone. This brings the total circulating supply to 120,730,199 ETH, significantly above pre-merge levels. The increase in ETH’s supply is directly tied to the decline in user activity on the Ethereum network, which has reduced its burn rate. Ethereum’s burn mechanism is directly tied to network usage, so when fewer transactions occur, less ETH is burned, resulting in ETH’s supply spiking.

Many users and developers are migrating from Ethereum to Layer-2 (L2) solutions like Optimism and Arbitrum. These networks offer significantly lower transaction fees and faster execution, reducing user activity on Ethereum’s mainnet. For example, as of April 30, the average transaction fee on Optimism’s mainnet was just $0.024, compared to $0.18 on Ethereum, which is over seven times more expensive. Additionally, the recent meme coin mania has drawn users away from Ethereum to other networks like Solana, further contributing to the decline in Ethereum’s transaction count and its low burn rate.

Ask Aime: Ethereum's declining burn rate due to reduced user activity on its network, leading to an increase in its circulating supply.

The drop in Ethereum’s user demand and the subsequent rise in ETH’s supply have raised important questions about the strength of its fundamentals. Vincent Liu, Chief Investment Officer at Kronos Research, noted that Ethereum’s fundamentals remain strong relative to other Layer 1s, particularly when considering its total value locked (TVL) of $368.921 billion, which positions it at the top of the leaderboard. However, Liu acknowledged that Ethereum ranks fifth in 24-hour fees, behind Tron, Solana, HyperLiquid, Bitcoin, and BNB Chain. He emphasized that the network still “demonstrates significant demand and usage.”

Temujin Louie, CEO of Wanchain, shares a similar perspective. He noted that compared to other Layer 1s, fundamentals remain Ethereum’s strength. Unlike many Layer 1s with aggressive inflation as part of their design, Ethereum’s post-merge architecture makes it potentially deflationary. However, the benefits of EIP-1559 depend on on-chain activity. Nevertheless, this is a structural advantage over most competing Layer 1s. Louie believes that the L1 network “remains a leader in decentralization and has a near-unmatched track record that continues to secure its place in the market.”

Even with strong fundamentals, declining activity on Ethereum poses challenges for ETH in the short- to mid-term. Liu explained that lower network activity generally signals weaker demand for ETH. At the same time, increased coin issuance on the network undermines Ethereum’s deflationary model, which was designed to support price appreciation. “This combination could result in bearish price movements,” Liu warned, “especially as investors look to alternative Layer 1s offering better scalability and lower fees.”

Kadan Stadelmann, cto of Komodo Platform, also highlighted the role of macroeconomic factors. “If Ethereum experiences an extended decrease in usage, the price could fall considerably depending on how much use drops, especially if the Fed continues its policy of quantitative tightening compared to quantitative easing. Short-term, this could mean price drops down to the $2,000 range. If the trend continues, however, then Ethereum could find itself in a prolonged consolidation period or outright downtrend.”

Despite the challenges, ETH currently trades at $1,834, noting a 1% price dip over the past day. The bullish pressure in the coin’s spot markets continues to strengthen, reflected by the coin’s climbing Relative Strength Index (RSI). At press time, this momentum indicator is at 57.68. ETH’s RSI readings signal growing bullish conditions, indicating that the altcoin has room for upward movement if buying pressure increases. In this scenario, its price could break above $2,027. However, if buying pressure loses momentum, ETH’s value could fall to $1,733.