Ethereum's transition to proof-of-stake (PoS) has led to unexpected consequences, as the network's supply has surpassed pre-Merge levels amid all-time low transaction fees. This move ends the deflationary period that began after the merge in September 2022. As network activity is trending down, supply growth is making a comeback. All of these changes make Ethereum’s price prospects, and relationship to network activity, particularly interesting now.

Since the initial announcement of the tariff, the cryptocurrency market continued its downturn, led in part by former US President Donald Trump’s tariff threats. Ether’s price then went from bad to worse, plummeting almost 50% from its peak at $3,432 on January 31. By March 11, it had fallen to $1,750 – a 16-month low. This market drawdown has created a ripple effect on Ethereum’s network activity and economics.

Transaction Fees at Record Lows

Ethereum’s average transaction costs have dropped off a cliff. On March 24, they fell to an all-time low of 0.00025 ETH, worth only $0.46. Low transaction fees are usually indicative of weak demand for block space. This is the same space that enables decentralized finance (DeFi), non-fungible tokens (NFTs), and so many other decentralized applications (DApps). Ether’s price has long been correlated with high network activity. Hence, investors are worried about the recent dip in transaction fees.

In August 2021, the London hard fork was adopted. This deflationary move came from the update’s implementation of a mechanism that burns 70% of transaction fees, assisting in lowering the total amount of ETH. Achievement is marred by the fact that transaction fees have declined drastically. Consequently, the daily ETH burn rate has dropped to all-time lows and is looking inflationary. This means that when network activity is low, less ETH is burned. As a result, newly issued ETH is more than the burned supply, and thus the asset becomes inflationary.

Ultrasound.money recently reported that the net ETH burn rate is down to 25,000 ETH per year. The growth of the supply has accelerated, currently at a positive annual rate of 0.76%, which increases the issuance rate to 945k ETH/year. Ethereum's daily transaction count has dropped to levels last seen in October 2024, before Donald Trump's presidential election victory.

Supply Growth and Inflationary Trends

As of April 2024, Ethereum’s supply began a continuous inflationary increase, undoing the deflationary path started with the Merge. The Merge removed Ethereum’s mining-based issuance, which had a very high supply inflation rate. Total supply of Ethereum has now crossed above pre-Merge levels, marking a major change in the network’s tokenomics.

First, the ETH burn rate has decreased and supply has thus increased. This combination has resulted in an inflationary environment for the cryptocurrency. Deflationary expectations were all the rage following the Merge. This new initiative was designed to slowly lower ETH’s net supply in the long term.

The relationship between network activity, transaction fees and supply growth is key to understanding what drives Ether’s price. The current deflationary trend and low fee costs show a decreasing demand for ETH. This reduced demand might go a long way in undercutting its overall value in the long term.

Potential Price Breakdown

The bear flag pattern on the daily chart lends credence to a potential breakdown in Ether’s price action. A daily candlestick close below the flag’s lower boundary at $2,000 would confirm the beginning of a huge breakdown. Following this technical analysis, Ether price is much likely to see downside pressure once again if the essential support isn’t maintained.

Investors and traders should closely monitor Ethereum's network activity, transaction fees, and supply growth to assess the potential impact on its price. The low transaction fees, increasing supply, and bearish technical formations all raise red flags.