Yesterday, SOL surpassed BNB in market value and once again became the fifth largest cryptocurrency by market value. At the same time, Multicoin Capital, an early investor in Solana, released a Solana governance proposal to modify the networks current inflation model and reduce the inflation rate of its native token SOL. The proposal number is SIMD-0228, and the goal is to adjust the issuance rate of SOL to a dynamic and variable mode to make it more market-oriented.
The proposal sets a target staking rate of 50% to enhance the security and decentralization of the network. If more than 50% of SOL is staked, issuance will be reduced, thereby discouraging further staking by reducing yields; if less than 50% of SOL is staked, issuance will be increased to increase yields and encourage staking. The minimum inflation rate will be 0%, while the maximum inflation rate will be determined based on the current Solana issuance curve.
In Solanas mechanism, inflation refers to the network issuing SOL to verification nodes that run the Solana software and assist in building the blockchain. The verification nodes will then distribute these issuance rewards and part of the MEV rewards to users who entrust them to stake SOL.
Currently, Solana’s inflation mechanism is fixed, meaning that the rate of SOL issued as staking rewards is static and does not change based on market conditions. But if the proposal is passed, the network’s inflation rate will become variable and adjust based on market dynamics.
Why this proposal was issued and its impact
Solanas inflation rate was initially set at 8%, and is scheduled to decrease by 15% each year until it drops to 1.5%. The Dune data dashboard shows that the current inflation rate of SOL is about 3.7%.
Solana co-founder Anatoly Yakovenko said in the Lightspeed podcast that the idea of a fixed inflation rate was borrowed from the design of the Cosmos blockchain, and that inflation is just a bookkeeping mechanism. Yakovenko is not particularly concerned about inflation because the issuance process of SOL does not create or destroy value, but only redistributes value. Newly minted SOL will be distributed to stakers, while the holdings of non-stakers will be relatively devalued.
Nonetheless, Multicoin believes that reducing SOL inflation is necessary for the following reasons:
Newly issued SOL is only distributed to stakers, which may lead to the centralization of the network; high inflation rates reduce the practicality of SOL in scenarios such as DeFi because the opportunity cost of unstaked SOL is too high; in addition, only 9% of staked SOL is liquid, and reducing staking rewards may also reduce selling pressure in some jurisdictions due to the fact that staking income is regarded as income.
Although technically speaking, issuance does not directly impose costs on the entire network, the negative perception that unstaked SOL is diluted by inflation is sufficient reason for Multicoin to limit inflation.
“Given the current level of network activity and fees, the current Solana inflation schedule is not ideal because it issues more SOL than is necessary to secure the network,” said Tushar Jain and Vishal Kankani, authors of the proposal. “This mechanism is not aware of network activity and does not factor it into the calculation of the inflation rate.”
If the proposal is implemented and works as intended, the authors believe it will “systematically reduce selling pressure while staking participation remains sufficient.” And “by aligning inflation adjustments with actual deviations, network issuance can better reflect the real-time economic and security status of the network,”
This proposal also has an obvious impact - the staking yield of SOL may decline. The current SOL staking yield has historically remained above 7%, and if the issuance volume decreases, this yield will decrease accordingly. Although the growth of MEV rewards may partially offset the impact of falling inflation, overall, the income from staking SOL may decrease.
What does the community think?
This proposal involves multiple stakeholders in the Solana ecosystem, and the community’s views on it are bound to have multiple voices.
Messari analyst Patryk said that this proposal should be passed because Solana will evolve from blind issuance to smart issuance, which will become a positive factor. He believes that the SIMD-0224 proposal is unfavorable to validators, has a neutral impact on stakers, and is beneficial to SOL holders.
“Currently, Solana’s total staking rewards far exceed the minimum necessary amount to ensure network security. The network has matured enough to no longer require such a high inflation rate. SIMD-0224 proposes to change Solana’s inflation rate from a fixed schedule to a programmatic, market-driven model. This change will dynamically incentivize staking participation, similar to the model adopted by networks such as @Polkadot. This will minimize inflation and bring the network’s stake ratio closer to MNA.”
Patryk believes that this move could reduce the selling pressure of SOL and reduce the current tax burden imposed on SOL holders who do not participate in staking.
Solana forum member Bji does not support this proposal. He believes that the main purpose of inflation is to encourage more validators to participate and maintain the security of the network, and inflation rewards will gradually decrease. Because Solanas plan is to let transaction fees gradually play a greater role in motivating validators, so that inflation rewards can be reduced as a supplement.
At present, the income of most validators through transaction fees, priority fees and MEV has actually far exceeded the part of inflation rewards. Therefore, even if the inflation rewards are reduced, the income of validators will not be greatly affected, but the rewards of stakers may be reduced.
Bji said that if a 50% drop in inflation leads to a 50% reduction in staked SOL as proposed, it does not matter because everyone will reduce their stakes by the same proportion; and after all holders reduce their stakes proportionally, the relative stake ratio held by the validator remains the same as before, so the voting power of the validator will not change substantially. Without a change in voting power, the security properties of the network will not change. Therefore, there is no reason to set a specific inflation rate target for security purposes.
Some community members also said that yield-oriented stakers will lose motivation due to a 50% reduction in staking rewards. As the total staked amount is reduced by 50%, the cost of attacking the network will also be significantly reduced. If only 20% of the total supply is staked, the distribution ratio of staking may remain the same, but this means that an attacker only needs to purchase and stake 10% of the total supply to shut down the network.
Currently, the community is still in a wait-and-see attitude towards this proposal. Solana founder Anatoly, Helius founder Mert and other core figures of the Solana ecosystem have not expressed their views on this proposal. However, the reform of Solanas economic mechanism is a concern for every SOL holder. Blockworks data analyst Dan Smith believes that Solana has officially entered the era of economic reform.
