A new governance proposal, SIMD-0228, introduced by Multicoin Capital, suggests significant changes to Solana's current inflation model. The core idea is to shift from a fixed inflation rate to a dynamic, market-driven issuance mechanism for SOL, aiming to better align the network's economic policy with its security needs and market conditions.
The proposal sets a target staking ratio of 50%. If the staking rate exceeds this threshold, the inflation rate would decrease, reducing rewards and discouraging further staking. If staking falls below 50%, inflation would increase to incentivize more participation through higher yields. The minimum inflation rate would be set at 0%, while the maximum would follow Solana’s existing emission curve.
In Solana’s ecosystem, inflation refers to the issuance of new SOL tokens to validators who help maintain and secure the blockchain. These validators then distribute a portion of these rewards, along with MEV (Maximal Extractable Value) earnings, to users who stake with them.
Currently, Solana employs a fixed inflation model where the issuance rate is static. If adopted, this proposal would transition the system to a variable inflation model that responds to real-time staking activity.
Why This Proposal Was Introduced and Its Implications
Solana’s original inflation model started at 8% and was designed to decrease by 15% annually until it reached 1.5%. According to current data from Dune Analytics, SOL’s inflation rate is approximately 3.7%.
Solana co-founder Anatoly Yakovenko has previously referred to inflation as merely an "accounting mechanism," noting that it doesn’t create or destroy value but redistributes it. Stakers receive new SOL emissions, while non-stakers see their holdings dilute over time.
Multicoin argues that reducing inflation is necessary for several reasons:
- High issuance may lead to centralization, as only stakers receive new tokens.
- Elevated inflation reduces SOL’s utility in DeFi and other applications due to high opportunity costs for non-stakers.
- Only 9% of staked SOL is currently liquid. Lower rewards could also reduce selling pressure in jurisdictions where staking yields are taxed as income.
Although inflation doesn’t impose a direct cost on the network, the negative perception of dilution for non-stakers is seen as a valid reason to curb emissions.
The proposal’s authors, Tushar Jain and Vishal Kankani, state: "Given the current network activity and fee structure, Solana’s existing inflation model is suboptimal because it issues more SOL than necessary to secure the network. The current mechanism is not responsive to on-chain activity."
If implemented, the proposal could "systematically reduce sell pressure while maintaining sufficient staking participation." It would also allow inflation adjustments to reflect real-time economic and security conditions.
One expected outcome is a reduction in staking yield. SOL staking rewards have historically been above 7%. A decrease in issuance would likely lower this yield. Although MEV rewards might partially offset the reduction, overall returns for stakers could decline.
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Community Reactions and Opinions
The proposal has sparked diverse reactions from various stakeholders within the Solana ecosystem.
Messari analyst Patryk supports the proposal, arguing that it would transition Solana from "blind issuance" to "smart issuance." He believes the change would be negative for validators, neutral for stakers, and positive for SOL holders.
"Solana’s staking rewards already far exceed the minimum required to secure the network. The network is mature enough to not need such high inflation. This proposal would adopt a programmable, market-driven model similar to Polkadot. It would minimize unnecessary inflation and help maintain a staking ratio closer to the ideal," Patryk stated.
He also suggested that lower inflation could reduce sell pressure and lessen the "tax burden" on non-staking holders.
Not everyone is in favor. Solana forum member Bji expressed concerns, noting that the primary purpose of inflation is to incentivize validators to secure the network. Although inflation rewards are designed to decrease over time, Bji argues that transaction fees and priority fees are already surpassing inflation-based rewards for many validators.
Bji also pointed out that if staking rewards drop by 50%, stakers may reduce their participation. If the total amount staked declines significantly, the cost of attacking the network could decrease. For example, if only 20% of the total supply is staked, an attacker might only need 10% to compromise the network.
So far, key figures like Solana founder Anatoly Yakovenko and Helius CEO Mert have not publicly commented on the proposal. Nevertheless, the possible economic changes are being closely watched by investors and analysts alike. As Blockworks analyst Dan Smith noted, "Solana is officially entering an era of economic transformation."
Frequently Asked Questions
What is the SIMD-0228 proposal?
It is a governance proposal suggesting a shift from Solana’s fixed inflation rate to a dynamic model that adjusts based on the network’s staking ratio. The goal is to improve economic efficiency and security.
How would the new inflation model work?
The model targets a 50% staking rate. If staking exceeds this, inflation decreases; if it falls below, inflation increases. This aims to balance incentives for stakers while controlling unnecessary token issuance.
Will this change affect SOL staking rewards?
Yes, if inflation is reduced, staking rewards are likely to decrease. However, MEV and transaction fee rewards may partially make up for the lower emissions.
Why is Multicoin Capital proposing this change?
The firm believes the current inflation rate is higher than needed to secure the network. Lower inflation could reduce sell pressure, improve token utility, and decrease perceived dilution for non-stakers.
What are the risks of lowering inflation?
Some argue that reduced rewards could lead to lower staking participation, which might, in theory, make the network more vulnerable to attacks if staking levels drop significantly.
Is the Solana community supporting this proposal?
Opinions are divided. Some analysts support the change for economic reasons, while others worry about security implications. The proposal is still under discussion, with no final decision made.