How should smaller clubs react to this development?
The crazy fees were also an opportunity for the runner ups since the costs of other investments (buildings, scouting networks, etc.) weren't inflated at the same rate as the player fees. It was a way how the money was passed down the pyramid, at least to some extent. If players choose to let their contracts run out, that revenue stream will subside.
I imagine smaller clubs will still insist on relatively long contracts and seek to extend them early on. After all, elite clubs aren't a very good entrance into professional football for young players and even if they were, they can't just hoard talents. They rely on smaller clubs granting them playing time. If young players then choose to let the contract run out, we might actually see more players in their prime playing for smaller clubs before moving on to bigger outfits.
But to be honest, I believe that this development primarily affects players who are already at an elite club. Young prospects still seem to move for relatively big sums, e. g. Havertz, Sancho, etc. This scenario of letting your contract run out seems to be the most likely one when he is already on a big paycheck and at a decent team.