The conversation around L1 token inflation has taken a critical turn, with industry experts like Shiva Madan pointing out that "L1 token inflation is a down-only metric." This statement, made in a tweet on June 26, 2025, has sparked a broader discussion on the sustainability of validator incentives and the future of proof-of-stake (PoS) networks. Let's dive into what this means and why it's significant for the blockchain community.

Understanding L1 Token Inflation

L1 token inflation refers to the rate at which new tokens are issued within a Layer 1 blockchain network, typically to reward validators or stakers for their participation in securing the network. Historically, high inflation rates were justified as a means to incentivize participation and ensure network security. However, as networks mature and usage patterns evolve, the necessity and impact of such inflation are being reevaluated.

Shiva Madan's tweet highlights a growing consensus that excessive token issuance is no longer a viable long-term strategy. Instead, the focus is shifting towards sustainable revenue models that do not rely on continuous token dilution. This shift is driven by several factors, including declining staking yields and the recognition that inflation can erode the value of existing tokens, ultimately harming the network's economics.

The Illusion of Staking Mania

The discussion around L1 token inflation is closely tied to the broader narrative of "staking mania," a term used to describe the period when high staking yields attracted significant investor interest. However, as noted by Tarun Chitra in a related tweet, staking yields have been decreasing, partly due to announcements like those from NEAR Protocol about reducing inflation rates. Chitra's bearish outlook on businesses built around staking revenue underscores the unsustainability of models that depend heavily on token issuance.

Haseeb Qureshi of Dragonfly Capital echoed this sentiment in a video discussion, suggesting that the idea of paying for security through inflation is somewhat of an illusion. He argued that nominal yields, which do not account for the underlying asset's depreciation, can mislead investors. This perspective is crucial because it challenges the traditional justification for high inflation rates, which was often framed as a necessary cost for network security.

Sustainable Revenue as the New Paradigm

So, what does this mean for the future of L1 networks? The answer lies in sustainable revenue generation. Validators, who are responsible for securing the network, should be incentivized by real revenue that the network generates, rather than artificial token issuance. This approach aligns with the idea that the value of a blockchain network should be derived from its utility and the economic activity it facilitates, rather than from speculative inflation.

For instance, NEAR Protocol's recent efforts to reduce inflation [link to gov.near.org] are a practical example of this shift. The protocol recognized that despite a fixed 5% annual inflation rate, minimal fee burns meant that nearly the full inflation rate was impacting the token supply. By adjusting this model, NEAR aims to align token economics more closely with actual network usage and revenue.

Implications for the Blockchain Community

The move away from inflation-driven models has several implications:

1. Enhanced Token Value: Reducing inflation can help stabilize or even increase the value of existing tokens, benefiting long-term holders and the overall network health.
2. Improved Security Models: As highlighted by Viktor Bunin [link to viktorbunin.medium.com], the security model of PoS networks is often misunderstood. A focus on sustainable revenue can lead to more robust and decentralized security mechanisms.
3. Evolving Business Models: Projects and businesses that relied on high staking yields may need to adapt. This could spur innovation in areas like decentralized finance (DeFi) and other revenue-generating applications on the blockchain.

Conclusion

The conversation initiated by Shiva Madan's tweet is a reminder that the blockchain industry is maturing. L1 token inflation, once seen as a necessary evil, is now viewed as a down-only metric that must be managed carefully. As networks like NEAR Protocol lead the way in reducing inflation and focusing on sustainable revenue, the broader ecosystem is likely to follow. This shift not only promises a more stable economic foundation for blockchain networks but also challenges practitioners to rethink how value is created and distributed in the digital economy.

For those in the blockchain space, understanding these dynamics is crucial. Whether you're a developer, investor, or enthusiast, keeping an eye on how L1 networks evolve their token economics will be key to navigating the future of this transformative technology.