The user base have been exploding lately but user engagement is still keeping up. But yeah I agree with that user engagement goes down with the number of users increase, but for now that statement doesnt hold.
Attracting a highly engaged crowd of people is easy when that crowd is small and you're operating in a niche; attracting a highly engaged crowd of hundreds of millions of people over a broad and diverse range of niches is a slightly greater challenge.
Reddit's community is much-maligned, but it's just a reflection of humanity as a whole. For every angry white male there are thousands of perfectly reasonable people just doing their thing in some small, obscure subreddit, surrounded by like-minded friends who just want to shoot the shit about knitting[1], or bagels[2], or flamenco[3], or the world outside their window[4].
It's pretty telling when one can define their political enemies by both gender and race. Identity politics got it's can of whoppass in 90ties. Are new generations really doomed to repeat mistakes of past generations?
Apologies for the ambiguity - for what it's worth, I only use the term ironically here since that's the vision most anti-reddit people seem to have of reddit's userbase, I probably should have put it in "quotes". Reddit is a diverse place and there's more than enough room for everybody.
I don't buy into all of this identity politics bullshit, dismissing someone for their race, gender, social status, sexuality, and so on is regressive and precisely people should be railing against, not perpetuating.
User engagement goes down with number of users, so it's really not a good metric for the "popularity" or even "value" of a site.