TL; DR
The current annual inflation rate of Polkadot is about 8%, and the total supply has reached 1.6 billion, with a historical destruction of only 20 million. High inflation leads to capital stasis, restricting the development of the entire ecosystem.
The community has proposed three inflation reform plans aimed at reducing the inflation rate to the mainstream PoS public chain level (3% ~ 6%) by 2026.
Reducing inflation will temporarily lower staking rewards, but combined with LST (liquid staking tokens) and DeFi incentives, it can drive funds from native staking to LST and derivative DeFi scenarios.
The current dilemma facing Polkadot
Since the autonomous online launch of Polkadot (DOT), the inflation mechanism has been a core topic of community discussion. Currently, the total supply of DOT is approaching 1.6 billion, with a historical cumulative destruction of only 20 million, representing a very low destruction ratio. Although the community passed proposal Ref #1139 in October 2024, reducing the inflation rate from 10% to 8%, and fixing the annual issuance at 120 million, the actual effect is still not ideal. At the current rate, it would take at least 10 years to reduce the annual inflation rate of DOT to around 4.3%.
The main issues facing Polkadot's economic model in the long term include:
High inflation pressure and excessively high native staking rewards: continuous issuance creates selling pressure on market prices, making it difficult for DOT to shape long-term scarcity and value anchoring. High staking APY attracts a large number of DOT into native staking or Nomination Pools, but these funds have not participated in DeFi and lack secondary utilization.
Lack of application scenarios: Currently, all newly added DOT comes from protocol inflation (also known as staking rewards), with only a small amount of DOT destruction from transaction fees, Coretime income, and other scenarios. The TVL of the Polkadot ecosystem is about $400 million, far lower than other public chains, and lacks killer applications to drive large-scale adoption, further limiting the effectiveness of DOT's secondary utilization and destruction mechanisms outside of governance and staking. This makes it difficult for the ecosystem to form a virtuous cycle, and the token value mainly relies on inflation rewards rather than real demand.
High staking rate and low capital utilization rate
In the current PoS ecosystem, apart from Ethereum, other public chain ecosystems face the problem of 'high staking rates but low LST penetration rates.'
According to Staking Rewards and Dune data, compared to Ethereum's staking rate of about 29.67%, other PoS public chains generally have a staking rate of over 50% — Sui network's total staking rate is as high as 73.51%, Solana network's total staking rate is 67.26%, Polkadot network's total staking rate is 49.2%, Aptos network's total staking rate is 96.46%, etc.
However, Ethereum's liquid staking and re-staking market penetration rate is around 36%, with the largest LST protocol Lido holding 24% of the staking market share; Solana's LST penetration rate is around 8.7%, with the largest LST JitoSOL accounting for about 4% of the entire staking market.
Looking at Polkadot again, the current number of staked DOT has reached 789 million, but the total amount of DOT staked on the largest Polkadot LST protocol Bifrost is only 19 million, with a penetration rate of liquid staking tokens (LST) at only about 3%.
Public Chain Total Staking Rate LST Penetration Rate Mainstream LST Protocol Share Ethereum 29.7% 36% Lido (steth) about 24% Sui 73.51% 17.5% Suilend (sSUI) about 9.1% Solana 67.3% 8.7% Jito (JitoSOL) about 4% Polkadot 49.2% 3% Bifrost (vDOT) about 2.4%
Most DOT holders are either native staking or Nomination pools, without choosing liquid staking, and do not participate in lending, LP, or cross-chain liquidity mining, resulting in extremely low ecological capital utilization.
The primary reason for the current high staking rate and low LST penetration rate is that the excessively high native staking APY limits the development of DeFi protocols, concentrating the demand for DOT on staking rather than utility, while other use case scenarios within the ecosystem are extremely thin, with very limited opportunities and yields to offer. This leads to users having little motivation to participate in liquid staking and DeFi activities, forming a vicious cycle.
The impact of the inflation reduction proposal on Polkadot
Model Total Supply Cap Inflation Reduction Rate Every Two Years 2026 Inflation Rate 2026 Staking Yield Advantages Strong Pressure Model 2.1 billion 50% 3.34% About 7% Rapid Creation of Scarcity Medium Pressure Model 2.5 billion 33% 4.35% About 8.3% Smooth Transition, Large Ecological Buffer Space Light Pressure Model 3.14 billion 13.14% 5.53% About 11.3% Best User Experience, Stable Short-term Returns
Polkadot adopts an NPoS consensus mechanism, and a high staking rate means stronger network security. If the inflation rate is reduced and leads to a decline in native staking APY, from a short-term perspective, this may cause staking users, especially large holders, to suffer a certain degree of loss in direct returns. However, from a long-term perspective, low inflation means stronger value support, which helps attract long-term holders and enhance economic security.
It should be noted that the inflation rate of this public chain itself has a significant impact on its LST ecosystem. Taking Ethereum as an example — the native staking yield of ETH is only 3-4%. On this basis, if we add a strategy that increases the yield by just 4%, it would double the original level. Coupled with the EIP-1559 burning mechanism, the network can achieve net deflation when it is highly active. Therefore, ETH has formed a positive ecological flywheel: low inflation + high capital utilization → ecological project growth → enhanced fees and burning → price and scarcity increase.
The insight for Polkadot is that low inflation needs to be paired with DeFi incentives and DOT application scenarios; otherwise, capital activity is difficult to release. When native staking returns decrease, users will more actively turn to LST to seek scenarios that can provide additional returns, which helps improve the penetration of LST, promote more effective allocation of funds, and is expected to drive the entire Polkadot DeFi to become more diversified and enriched.
Reducing inflation is not the endpoint
Polkadot, while reducing inflation, needs to set DeFi incentives as a buffer mechanism to achieve a 'soft migration' of funds, releasing liquidity while maintaining network security. This not only compensates for the short-term impact of declining staking rewards but also enhances overall ecological activity. Possible paths include:
Introducing DOT LST into more scenarios such as lending, LP, leveraged trading, and cross-chain mining, enhancing the composability of funds and multi-layered return structures. Currently, Bifrost's vDOT has captured over 70% of the DOT LST market, with a TVL exceeding $90 million. This can form short-term return compensation, smooth the pain of declining staking APY, and enhance user holding motivation.
Utilizing bridges such as Hyperbridge and Snowbridge to facilitate cross-chain interactions from networks like Ethereum and Solana to Polkadot and its parachains, attracting external users and funds into Polkadot through treasury fund incentives, breaking liquidity islands.
Continuously injecting incentives into Hydration to attract external assets into the Polkadot network. The Gigahydration event uses 2 million DOT in incentives over 6 months, successfully attracting mainstream assets such as ETH, SOL, AAVE, and LDO, significantly enhancing ecological TVL and user participation.
A dilemma and an opportunity
The core problem currently faced by Polkadot is the contradiction between high inflation and high staking rates, leading to capital stasis and insufficient ecological activity. In the absence of sufficient application scenarios and DeFi incentives, the value capture of DOT mainly relies on inflation rewards rather than real usage demand, restricting the sustainable growth of the ecosystem.
For the Polkadot community, regardless of which solution is ultimately chosen, Polkadot should find ways to increase the application scenarios and value capture mechanisms of DOT and actively build a complete DeFi ecosystem.
In the short term, a reasonable inflation adjustment plan (such as the medium pressure model) combined with phased DeFi incentives will be key to the transition; in the long run, only by continuously activating capital flow (DeFi, stablecoins, payments, liquid staking, etc.) and incubating ecological applications that attract more users can Polkadot truly achieve stable growth and circulation of internal and external value.
Polkadot stands at a critical historical juncture, and how to balance short-term pain and long-term sustainable growth will test the wisdom and consensus of the entire community.
