Personally, I think a budget cap is the way to go. Yes, this means that you'll be excluding some "real" indies, but I think that's okay - those guys have been successful enough to find a large budget game, so they probably don't need the help. Anything else, and I think you just open it up to too much of a mess, which gets you arguments like this one. Enforcement could be an issue, but meh... you don't actually have to police this until you've at least gotten it down to the finalists.
Anyway, even if Eden had won, that wouldn't have been nearly as bad as some past IGFs. Better a quirky grappling hook game than some of the multi-million dollar past winners, like Savage, which was just a rehash of a HL mod (Natural Selection) or Shattered Galaxy, which was pretty much a huge generic mess.
That said, I don't actually think this is the biggest problem of the IGF. The much more screwed up thing imo is that judges get to self select at least some of their games. If you stop and think about the consequences of this, it goes something like this:
1) Judge plays his assigned 10 games. Hurray!
2) Judge then picks more games to play. Nearly every time, he will select games he's heard about and is interested in trying.
3) These games are much more likely to get high scores this way that they would by random assignation, since judges are going out of their way to pick games that appeal to their gameplay and aesthetic biases.
4) Basically, it's a system that tends to really favor the chances of the games with the most exposure, which seems to me to really go against the spirit of the IGF.