The past few months have been difficult for the Ethereum ecosystem, with ether (ETH) falling to levels not seen since 2020. ETH is significantly underperforming compared to bitcoin (BTC) and some major cap altcoins. Worse still, the bleeding does not appear to be stopping soon.

According to a report by the market analytics platform CryptoQuant, diminished network activity is one of the major reasons why Ethereum has been losing value. This continued subdued activity is contributing to a high inflation rate for ETH, making the cryptocurrency lose its value over time.

Diminishing Network Activity

The number of active addresses on Ethereum has been reducing steadily since the beginning of the year. In addition, average fees per transaction and per block have plummeted to record lows. As a result of the 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 to ensure the asset remained deflationary over time. These coins are taken from Ethereum gas fees and permanently removed from the supply.

The Merge, which marked the transition of Ethereum from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism, aimed to bolster this concept by ensuring more ETH was burned than produced.

However, after the Dencun upgrade last year, which introduced blobs and reduced transaction fees, less ETH was burned and more minted. This caused ether to become inflationary again. With the ETH burn rate hovering around its lowest level since the Merge, inflationary pressures on the cryptocurrency have intensified.

Ethereums recent underperformance can be largely attributed to diminished network activity, as evidenced by declining active addresses and reduced transaction fees. These factors, coupled with a low burn rate post-Dencun upgrade and a continuous high inflation rate, continue to exert downward pressure on the assets value, said pseudonymous CryptoQuant analyst EgyHash.

ETH Down 4% Daily

Furthermore, EgyHash stated that Ethereum faces a chance at potential recovery if there is a positive change in the networks activity—an increase in active addresses, which would lead to higher transaction fees and more ETH being burned.

At the time of writing, ETH was worth $1,790, down 4% daily per data from CoinMarketCap. Notably, the asset was negatively affected by the announcement confirming the implementation of trade tariffs in the United States.

Moreover, ether has lost 16% of its value in the past month and is down by more than 60% since this cycles peak at just over $4,000.