Over the past several months, Ethereum has witnessed a notable reduction in user activity on its blockchain. This downturn has led to a decrease in the network's burn rate, a mechanism designed to gradually reduce the supply of ETH over time.

As the number of tokens being burned has diminished, the circulating supply of ETH has increased, placing upward pressure on its inflationary dynamics. Consequently, the cryptocurrency has faced challenges in maintaining a stable price above the $2,000 mark in recent weeks.

Data from Ultrasoundmoney reveals that, within the last month alone, 72,927 ETH, equivalent to approximately $134 million at current market prices, were added to Ethereum's circulating supply. At the time of reporting, the total circulating supply stands at 120,730,199 ETH, marking a substantial increase compared to pre-merge levels.

The rise in ETH's supply can be attributed to a decline in user activity on the Ethereum network, which has consequently lowered the burn rate. Introduced via EIP-1559, Ethereum's burn mechanism involves destroying a portion of transaction fees to reduce the circulating supply of ETH.

However, this mechanism is closely linked to network usage. When transaction volume decreases, as observed recently, fewer ETH tokens are burned, leading to a spike in the overall supply. According to Etherscan, the daily amount of ETH burned has decreased by 95% year-to-date. The network recorded its lowest single-day burn amount on April 20.

Many users and developers have migrated to Layer-2 (L2) solutions such as Optimism and Arbitrum, which provide significantly lower transaction fees and faster execution times, thereby reducing activity on Ethereum's mainnet. For instance, as of April 30, the average transaction fee on Optimism's mainnet was just $0.024, whereas executing a transaction directly on Ethereum cost users an average of $0.18 on the same day, representing over seven times higher costs.

Additionally, the recent meme coin craze has drawn attention to \"Ethereum killers\" like Solana, attracting users away from Layer-1 (L1) networks. These trends collectively have resulted in a decline in Ethereum's transaction count, contributing to its low burn rate.

The reduction in Ethereum's user demand and the concurrent increase in ETH's supply have sparked discussions regarding the network's fundamental strength. When asked to compare Ethereum's current position with other Layer-1 networks amidst broader market weakness, Vincent Liu, Chief Investment Officer at Kronos Research, expressed his view. Although Liu admitted that Ethereum ranks fifth in 24-hour fees, trailing behind Tron, Solana, HyperLiquid, Bitcoin, and BNB Chain, he underscored that the network still exhibits considerable demand and usage.

Temujin Louie, CEO of Wanchain, echoed a similar sentiment. During a conversation with BeInCrypto, Louie remarked that while heightened activity on Layer-2 solutions and \"Ethereum killers\" like Solana might have caused a decline in user demand on Ethereum itself, he believes the Layer-1 network remains a leader in decentralization and possesses an unmatched track record that secures its standing in the market.

Even with robust fundamentals, the diminishing activity on Ethereum presents short- to mid-term challenges for ETH. Liu explained that reduced network activity typically signifies weaker demand for ETH. Simultaneously, the increased issuance of coins on the network undermines Ethereum's deflationary model, which was crafted to support price appreciation.

Kadan Stadelmann, CTO of Komodo Platform, also pointed out the influence of macroeconomic factors. ETH is currently trading at $1,834, showing a 1% price dip over the previous day. Despite this minor pullback, the bullish momentum in ETH's spot markets persists, indicated by the rising Relative Strength Index (RSI).

At the time of reporting, this momentum indicator stands at 57.68. ETH's RSI readings suggest growing bullish conditions, implying potential for further upward movement should buying pressure intensify. In such a scenario, the price could surpass $2,027.

Conversely, if buying pressure wanes, ETH's value might retreat to $1,733.

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