Pledge Inflation Reform Traps Ethereum and Solana

Ethereum and Solana face an unavoidable centralization dilemma.

Written by: Thejaswini M A

Compiled by: Chopper, Foresight News

In 1487, Henry VII was in urgent need of funds. Two years prior, he had seized the English throne at the Battle of Bosworth Field, and maintaining his rule was costly. The task of taxation fell to the Lord Chancellor, John Morton.

Legend has it that Morton had his own methods. He visited the homes of nobles, observing their living conditions: if a noble lived extravagantly, Morton deemed them wealthy and expected them to pay tribute to the king; if a noble lived modestly, Morton considered them good savers and equally capable of tribute.

There was no third option. Regardless of what Morton observed, the outcome was always the same: the nobles had to pay.

This anecdote is a second-hand account. In 1622, Francis Bacon recorded it, and the story was still widely circulated among the public. The term "Morton's Dilemma" only gained popularity in the 19th century, but this logic has endured due to its practical relevance. The "dilemma" here refers to two choices leading to the same outcome, in stark contrast to a win-win situation.

Currently, Ethereum and Solana find themselves in such a predicament.

Both public chains reward validators by minting new tokens and are attempting to reduce the inflation subsidies. Ethereum's proposed adjustments have faced strong opposition; Solana's proposal is currently being voted on, with the vote ending on August 18.

On one hand, if the existing staking rewards for validators are maintained, the staking sector will favor large institutional service providers with ample funds; on the other hand, if rewards are cut, small node operators will be the first to feel the pressure, as their operating costs are fixed and profit margins are already minimal.

Whichever path is chosen, the number of validators will ultimately decline. This article will dissect the debate over the inflation policies of the two public chains: they are forced to make a choice, merely deciding which form of centralization to adopt.

Ethereum: EIP-8363 Gradual Inflation and Destruction Proposal

On August 4, Ethereum researchers Justin Drake and Jérôme de Tychey released a draft titled "Gradual Inflation and Destruction Proposal," or EIP-8363. The core mechanism is that as the total staked ETH increases, the proportion of validator rewards destroyed by the protocol will also rise.

Once the total staked amount reaches 60.25 million ETH (about half of the total supply), the reward destruction ratio will reach 100%, and the staking inflation yield will drop to zero.

Currently, about 41.4 million ETH is staked, accounting for 34% of the total supply, corresponding to approximately 890,000 validators, with an average staking yield of 2.67%. Aave founder Stani Kulechov calculated that if implemented at the current scale, the validator yield would drop from 2.862% to 1.476%, nearly halving.

Within three days of the proposal's release, Stani Kulechov, SharpLink CEO Joseph Chalom, and ether.fi's Mike Silagadze publicly expressed their opposition.

EIP-8363 is still in the early draft stage, undergoing preliminary review on GitHub, and is far from finalization and implementation, missing the upcoming Ethereum Hegotá upgrade; however, the proposal still has a chance to be submitted for review in future network upgrades.

To understand why the staking community vehemently opposes reward cuts, one must look at the size of this revenue pie. Ethereum relies on minting tokens to incentivize participants to secure the network, with the protocol minting about 1.1 million ETH annually for validators. At a price of $1,921, this amounts to an annual compensation pool of $2.1 billion.

Number of active validators on Ethereum

Solana's mechanism is similar, but its inflation is larger relative to its economic scale. Solana mints about 19 to 22 million SOL annually, worth approximately $1.5 billion at current prices. The daily transaction fees paid by users, combined with Jito tips, total 6,400 to 9,600 SOL, amounting to about $225 million annually. This means that user fees only cover 13% of the total income for validators, with the rest relying entirely on token inflation. Ethereum's situation is similar, with Chalom estimating that fees account for about 15% of staking income, while the remaining 85% comes from inflation.

Solana's annual inflation rate is 3.7%, while Ethereum's is only 0.85%. For SOL holders who do not participate in staking, their assets are diluted at a rate more than four times that of ETH holders under the same conditions.

In traditional finance, the National Securities Clearing Corporation (NSCC) is involved in nearly all stock and bond transactions in the U.S. Its parent company, DTCC, is expected to handle $470 trillion in securities transactions by 2025, with assets under custody totaling $11.5 trillion. The NSCC has established a member default protection fund of $19.7 billion, funded by its members, with the NSCC itself contributing only $130 million.

To attack the Ethereum network, an attacker would need to control 41.4 million staked ETH, corresponding to a financial barrier of $79.6 billion, four times the size of the NSCC's protection fund. This is just the minimum requirement; if someone were to aggressively buy ETH, the massive buy orders would quickly drive up the price. Additionally, attackers would need to build a large-scale server cluster distributed globally to utilize these chips. Ethereum has built-in defense mechanisms that would trigger the immediate destruction of all staked assets of any malicious actor, and failure to attack means all investments are permanently lost.

However, the operational logic of the two systems still differs significantly.

NSCC members pay a $19.7 billion margin, which serves merely as an entry threshold for trading; this fund does not generate any returns, and members prefer to keep this amount as low as possible. In contrast, Ethereum offers a 2.67% annual yield on equivalent staking funds, while Solana's staking yield reaches 5% to 8%.

Years of stable staking yields have fostered a complete commercial ecosystem around it. Currently, about $35 billion in liquid staking tokens like stETH are used as collateral in various crypto lending platforms. Traders rely on these tokens to build circular leverage strategies: depositing LST into Aave or Morpho, borrowing WETH, and staking again, repeating the process. The premise of this strategy is that the staking yield must be higher than the borrowing rate. Pendle has created a fixed-rate market based on staking yields, and Curve has established related trading pools for investors to exit; SharpLink holds $3 billion in ETH reserves, most of which is staked through Coinbase, Anchorage, Figment, and Galaxy.

Staking yields have become the benchmark interest rate for the entire DeFi market. If the consensus layer rewards are directly halved, the leverage circular strategies will turn from profit to loss, forcing Pendle's fixed rates to be repriced, and lending platforms must comprehensively reassess the collateral value of all liquid staking tokens.

Key Differences Before and After the Merge: Miners and Stakers Cannot Be Equated

Before Ethereum's merge, the protocol minted about 13,000 ETH daily for miners; after the merge, it only mints about 1,700 ETH daily, an 88% reduction in inflation. Miners had invested billions of dollars in hardware over the years and strongly resisted the change, ultimately leading to the fork that created ETHW, which is now worth less than 1% of ETH.

However, the miner community and the DeFi financial system are independent of each other. Miners provide computing power for rewards, and no complex financial products are built around mining profits. Their income is not used as collateral for chain-wide lending, so even if their earnings drop to zero overnight, the lending market will not be impacted. After miners exit, the remaining system can operate normally without adjustments.

Stakers bear a dual role. On one hand, they maintain network security; on the other hand, the staked tokens they receive serve as the underlying collateral for half of DeFi's lending business. Therefore, a reduction in staking yields will affect all financial ecosystems built upon it.

Mancer Olsen proposed a theory in 1965: smaller groups with potentially high returns often have more agency than larger groups with minimal individual interests. Smaller groups have stronger motivations to voice their opinions and engage in competition.

Regardless of whether nodes can profit, running a validating node incurs fixed costs: servers, electricity, network, etc. Currently, staking 32 ETH yields about 0.92 ETH annually, equivalent to $1,760. If the new gradual proposal is implemented, annual income will drop to 0.47 ETH (about $900). With operating costs unchanged, expenses that previously accounted for 20% of income will suddenly approach half of it. If a penalty occurs due to proof errors, the corresponding loss will double the proportion of earnings.

According to Olsen's theory, ordinary token holders belong to a large group: Ethereum mints new tokens annually for stakers, continuously diluting the assets of ordinary holders. However, the dilution is spread across everyone, resulting in negligible losses for each individual, only a fraction of a percent annually, making it difficult for the majority to perceive and lacking motivation to protest.

In contrast, large staking service providers belong to a small group: all newly minted tokens flow significantly to them, corresponding to billions of dollars in income, and the survival of these companies entirely depends on this revenue. Once the network cuts rewards, these companies will suffer massive losses.

Proponents of reducing inflation argue that current staking yields are too high, continuously attracting ETH inflows, with most of the yields concentrated in major exchanges and staking service providers. In the first half of 2026, institutional funds are expected to drive the total staked ETH up by about 15%. The proposal aims to raise the marginal staking costs, making new staking unprofitable, thereby curbing centralization.

Opponents argue that directly cutting rewards will first lead to the closure of ordinary individual operators who run nodes at home. In fact, both sides share the same goal—avoiding a few capital giants from controlling Ethereum. The disagreement lies in whether reducing yields or maintaining yields will more quickly damage the network's decentralization.

Solana Faces the Same Dilemma

Solana validators must pay about 389 SOL in voting fees annually, regardless of whether nodes are profitable, market fluctuations, or whether they receive delegated staking. This cost must be paid. Currently, the staking yield is about 6.5%, and the breakeven point for nodes is approximately 200,000 delegated SOL. The number of active validators on Solana has dropped from a peak of 2,500 to 683; however, the total staked SOL has risen to 430 million, accounting for nearly 68% of the stakable supply.

Changes in the number of Solana validators

Solana is currently voting to advance reward reforms. The SIMD-0550 proposal expands the annual deflation increase from 15% to 30%, advancing the timeline for achieving a long-term inflation target of 1.5% from 2032 to 2029, expected to reduce future minting by 18.9 million SOL. The SIMD-0553 proposal redesigns the fee mechanism based on resource usage, increasing the daily destruction amount from 648 SOL to 7,500 to 9,000 SOL. Even at the upper limit, the destruction scale remains far below the 60,000 SOL rewards distributed daily.

Voting will conclude on August 18, and the proposal requires an absolute majority of over 66.67% of the total staked amount to pass.

We are accustomed to viewing blockchain governance as a practice of autonomous decision-making, where code and community votes determine the future of digital economies. However, both Ethereum and Solana exhibit the same trend: protocol rules are ultimately constrained by the realities of financial laws. When early creators designed economic models, they hoped the market would spontaneously maintain a decentralized structure. Yet, once public chain assets grow to become the cornerstone of global liquidity and targets for institutional asset allocation, the underlying economic forces of yield, leverage, and operational costs will inevitably override the initial design vision.

If a public chain relies on distributing rewards to attract users to lock in assets for expansion, it will inevitably hit this wall. Regardless of the outcome of Solana's vote next Monday or how Ethereum chooses its related proposals, they are merely deciding: how long until we reach the finish line and hit the barrier.

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