Will Solana's inflation model modification proposal help SOL prices rise further?

Author: shushu, BlockBeats

Yesterday, SOL's market capitalization surpassed BNB and once again became the fifth largest cryptocurrency by market capitalization. At the same time, Multicoin Capital, an early investor in Solana, released a Solana governance proposal aimed at modifying the network's current inflation model and reducing the inflation rate of its native token SOL. The proposal number is SIMD-0228, with the goal of converting SOL to The issuance rate is adjusted to a dynamic and variable mode to make it closer to market guidance.

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, thus discouraging further staking by lowering 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 Solana's mechanism, inflation refers to the network issuing SOL to verification nodes that run 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 entrusted them with staking SOL.

Currently, Solana's inflation mechanism is fixed, meaning the rate of SOL issued as staking rewards is static and will not change based on market conditions. But if the proposal passes, the network’s inflation rate will become variable and adjust based on market dynamics.

Why this proposal was released and its impact

Solana's inflation rate is initially set at 8%, with plans to reduce it by 15% each year until it falls 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 on 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 it. The newly minted SOL will be distributed to stakers, while the holdings of unstakers will be relatively devalued.

Nonetheless, Multicoin believes that reducing SOL inflation is necessary for the following reasons:

Newly issued SOL is only allocated to stakers, which may lead to network centralization; high inflation rates reduce the utility of SOL in scenarios such as DeFi, because the opportunity cost of unstaking SOL is too high; in addition, only 9% Staked SOL is liquid, and reducing staking rewards may also reduce selling pressure in some jurisdictions where staking proceeds are treated as income.

Although technically speaking, the issuance does not cause direct costs to the entire network, the negative perception caused by unstaking SOL being diluted due to inflation is sufficient reason to limit inflation in Multicoin's view.

“Given the current level of activity and fees on the network, the current Solana inflation plan is not ideal because it issues more SOL than is needed to secure the network,” said the authors of the proposal, Tushar Jain and Vishal Kankani. “This mechanism cannot Sensing network activity and not factoring it into the calculation of the inflation rate.”

If the proposal is implemented and works as expected, the authors believe it will "systematically reduce selling pressure while staking participation rates remain adequate." 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 decrease. The current SOL staking yield has historically remained above 7%. If the issuance volume decreases, this yield will decrease accordingly. While the growth in MEV rewards may partially offset the impact of lower inflation, overall the benefits of staking SOL may decrease.

What does the community think?

This proposal involves multiple stakeholders in the Solana ecology, and the community's views on it must have generated multiple voices.

Messari analyst Patryk said this proposal should be passed because Solana will evolve from "blind issuance" to "intelligent issuance" and become a positive factor. He believes that the SIMD-0224 proposal is detrimental to validators, has a neutral impact on stakers, and is beneficial to SOL holders.

“Currently, Solana’s total staking rewards have far exceeded the minimum necessary amount required to ensure network security. The network has matured enough that such a high inflation rate is no longer needed. SIMD-0224 proposes to change Solana’s inflation rate from a fixed plan model to Programmatic, market-driven model. This change will dynamically incentivize staking participation, similar to the model adopted by networks like @Polkadot, which will minimize inflation and bring the network’s staking ratio closer to MNA.”

Patryk believes that this move may reduce the selling pressure on SOL and reduce the "tax burden" currently 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 that inflation rewards will gradually decrease. Because Solana’s plan is to let transaction fees gradually assume more roles to incentivize validators, so that inflation rewards can be reduced as a supplement.

At present, the income gained by most validators through transaction fees, priority fees and MEV actually far exceeds the inflation reward. Therefore, even if the inflation reward is 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 the inflation rate leads to a 50% reduction in staked SOL as stated in the proposal, it does not matter because everyone will reduce their stake in the same proportion; and after all currency holders reduce their stake in proportion , the relative stake ratio held by validators remains the same as before, so the voting rights of validators will not change substantially. Voting rights don’t change, and neither do the security attributes of the network. Therefore, there is no reason to set a specific inflation rate target for safety purposes.

There are also some community members who expressed that revenue-oriented stakers will lose motivation due to the 50% reduction in staking rewards. With the total staking amount 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 of pledges may remain the same, but this means that an attacker only needs to buy and stake 10% of the total supply to shut down the network.”

At present, the community is still in a wait-and-see and discussion attitude towards this proposal. Solana founder Anatoly, Helius founder Mert and other core figures in Solana ecology have not expressed their opinions on this proposal. However, the reform of Solana's economic mechanism is a concern of every SOL holder. Dan Smith, a data analyst at Blockworks, believes that "Solana has officially entered an era of economic change."