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Solana’s economic model relies on proof-of-stake (PoS), where the SOL token is issued at a rate determined by a time-based schedule that decreases over time, distributing rewards to validators and delegators. Two new Solana Improvement Documents (SIMDs), SIMD-0228 (Market-Based Emission Mechanism) and SIMD-0123 (Block Revenue Sharing), propose significant changes to how SOL is issued, how fees are distributed, and how validators, stakers, and the broader ecosystem are incentivized. These proposals aim to fine-tune Solana’s tokenomics for long-term sustainability, balancing lower inflation with robust security and fairer reward distribution.
SIMD-0228 introduces a dynamic, stake-based inflation schedule to replace the current declining but fixed issuance. When more of the total SOL supply is staked, inflation goes down; when stake participation drops, inflation rises automatically to incentivize increased staking. This ensures Solana only inflates as needed to secure the network.
SIMD-0123 allows an in-protocol distribution of transaction fees (primarily priority fees) to delegators, not just validators. The protocol automatically divvies up block revenue between validators (as commission) and their delegators, replacing manual or third-party distribution mechanisms.
The combined goal is to reduce unnecessary inflation, reward active participation, and more fairly allocate network revenue. Below is a summarized analysis of each SIMD’s direct and second-order effects on SOL holders, stakers, validators, and DeFi usage, referencing relevant comparisons to Bitcoin, Ethereum, and existing Solana structures only where beneficial.
Under the current schedule, Solana’s inflation started high (~8%) and decays ~15% annually until hitting a floor of ~1.5%, regardless of network conditions. This was useful for bootstrapping the network, but over time Solana has grown a large, active set of validators and substantial off-chain revenue (like MEV tips). The network is potentially overpaying for security.
SIMD-0228 replaces the fixed time-based model with a formula that reduces or increases the issuance rate depending on the total percentage of SOL staked (s). If s is high (e.g., 65–70%), inflation drops near or below 1%. If s falls, the protocol boosts inflation to attract more stake. This approach aims to keep inflation at the “lowest necessary” level for adequate security, preventing excessive dilution for SOL holders.
Lower Inflation: With Q1 2025 data showing staking yields trending between 7-12% the network might not need as much inflation to keep stakers incentivized. As more stake accumulates, inflation ratchets down automatically.
Reduced Dilution: A lower inflation rate lets SOL holders maintain more of their purchasing power. Stakers face less pressure to sell rewards for taxes in high-inflation scenarios.
Responsive Security Model: If many unstake, the system raises issuance to boost APY, nudging stakers back. This helps preserve network security without requiring ad-hoc governance changes.
Potential Price Stability: Less inflation can diminish the perpetual selling pressure from stakers covering costs or taxes, potentially supporting SOL’s price.
Stimulus for DeFi: When inflation is high, stakers earn easy yields, which can reduce SOL’s use in lending and other DeFi. Cutting inflation lowers the baseline “risk-free” rate, making DeFi yields more competitive.
Market Perception: Adopting a dynamic, market-informed model might bolster investor confidence that Solana can adapt to actual security needs rather than sticking to a legacy schedule.
Variable Rewards: Staking APR will fluctuate with network-wide participation. Higher stake → lower APR from inflation; lower stake → higher APR.
Better Long-Term Accumulation: Even if nominal APYs dip, a low-inflation environment can mean better real returns for dedicated stakers, whose share of total supply grows more meaningfully.
Second-Order Effect: If inflation shrinks significantly, some stakers may consider alternative DeFi strategies, but the protocol’s design can lift inflation if stake drops too low, balancing security.
Lower Subsidies: Validators currently relying heavily on inflationary rewards see a drop in total issuance. The volume of SOL matters more here than fiat price, because validator expenses (e.g., voting fees) are also in SOL.
Dependency on Fees & MEV: As inflation declines, validators lean more on priority fees, Jito MEV tips, and other revenue. Smaller validators or newcomers could struggle if overall block rewards shrink too far, potentially encouraging consolidation.
Centralization Risk: Tighter margins might push less efficient validators out, benefitting larger or more professional operators who can handle overhead more cheaply.
Balancing DeFi Usage: A moderate staking rate and stable low inflation could free up more SOL for lending, liquidity pools, etc.
Potential Security Concerns: If macro conditions cause a severe drop in staking, inflation can jump. This might be jarring during market downturns, but it’s intended as an automated safety net.
Validator Churn: Marginal validators might exit if net rewards in SOL become too slim, creating centralization worries unless more efficient or mission-driven validators fill the gap.
SIMD-0123 proposes protocol-level sharing of priority fee revenue among delegators. Currently, off-chain revenue arrangements exist where the fees are partially redistributed, but that process can be trust-based or limited. SIMD-0123 automates fee distribution for priority fees. A validator can set a commission rate on these block fees, and the remainder is paid pro rata to stakers.
Aligns Delegators and Validators: Delegators no longer miss out on priority fees. This more fairly rewards everyone whose stake contributes to block production.
Stronger Staking Incentive: With stakers now earning part of the fee revenue, the total staking yield increases, even if inflation is reduced under 0228.
Transparency & Protocol Enforcement: Instead of relying on out-of-protocol solutions, fee sharing becomes trustless. Delegators can see on-chain what commission they’ll pay.
Increased Staking Participation: As stakers also get fee rewards, more SOL could end up staked, potentially reducing liquid supply.
No Additional Inflation: Block revenue is redistributive; it doesn’t inflate the token supply. The shift from burning to distributing fees might marginally boost supply retention, but if stakers hold rewards, effective circulation could still be restrained.
DeFi Dynamics: If staking yields rise from fee sharing, some capital might move from DeFi back to staking unless DeFi protocols offer competitive yields. Liquid staking tokens (e.g., Jito SOL) help keep SOL liquid for usage.
Boosted Returns: Combining inflation-based rewards plus a share of block fees grows total APY. Q1 2025 data indicates that LSTs yield around 7-8% with a portion of the MEV. Including priority fees might stabilize or modestly increase those yields, compensating for a lower inflation schedule.
Minimal Overhead: It’s handled by the core protocol, so stakers don’t need to rely on validator-run scripts or external programs.
Reduced Fee Retention: Validators no longer keep 100% of block fees. They’ll only retain their commission portion. This could intensify competition on commission rates if larger pools run at 0%, pushing overall commissions lower (“race to the bottom”).
Potential Centralization Pressure: As inflation declines and fee revenue must be shared, smaller validators may face thinner margins. Some might consolidate or exit if they can’t remain profitable in SOL terms, leading to fewer, more capitalized validators.
No Direct Change to Fee Accrual Mechanics: Validators still accrue fees only when they produce a block. Larger validators still produce more blocks overall. Thus volatility in fee-based revenue remains tied to how many slots a validator wins.
Interaction with 0228’s Reduced Inflation: Lower inflation means less guaranteed SOL issuance for validators. With fee sharing, delegators also gain more, which might help maintain high stake participation. However, smaller validators could be squeezed if both inflation decreases and fees get divided.
Further Decentralization or Concentration?: The outcome depends on whether the new fee-sharing model encourages delegators to spread stake or if big 0% commission pools like Jito overshadow smaller operators.
Economic Efficiency: Over time, if the network’s fee volume grows, stakers can rely more on “real” usage-derived yields. This shift parallels other PoS chains that rely heavily on usage fees rather than large inflation subsidies.
Critics point out that:
Lower Inflation Squeezes Margins: High-quality infrastructure and node costs (denominated in SOL) remain, but rewards in SOL might shrink. If validators cannot keep up, they drop out, potentially boosting the stake of bigger or more efficient validators.
Race to 0% Commission: Validators in the Jito set have decreased their commission to 0% for competitiveness. Other validators might feel forced to lower commissions, reducing their revenue and possibly driving some out of business.
Big Operators Advantage: Larger validators with economies of scale can handle low commission better. This could gradually centralize stake unless delegators actively spread out.
Hence, while fee sharing and dynamic issuance improve overall network efficiency, they also raise the bar for validator viability, potentially concentrating stake with major pools or professional operators. This tension remains a core challenge, requiring active community governance to prevent excessive centralization.
SIMD-0228 and SIMD-0123 constitute a major update to Solana’s economic design. 0228 ensures issuance adapts to staking participation, reducing inflation when stake is high and boosting it if stake falls. 0123 implements an in-protocol framework so delegators also receive a share of priority fees, not just newly minted SOL.
For SOL itself, these proposals can:
Lower Long-Term Inflation, improving its appeal for holders.
Tie Staking Rewards More Closely to Usage, giving delegators upside from transaction fees.
Potentially Pressure Validator Profitability, leading to either consolidation or more efficient operators.
While these measures make SOL’s economics more sustainable by linking rewards to real network conditions, they also risk intensifying centralization. A vibrant ecosystem with broad validator participation and diversified delegations is crucial for preserving security and decentralization. Close monitoring and potential parameter adjustments may be required to preserve a healthy validator ecosystem.
Overall, the changes reflect Solana’s continued effort to refine incentives, reduce dilution, and align rewards with actual network activity, aiming to secure the network more efficiently over the long run.
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