Forwarded the Original Title: Can Solana’s Inflation Model Proposal Drive SOL Price Higher?

Yesterday, SOL’s market capitalization surpassed BNB and once again became the fifth largest cryptocurrency by market capitalization. Meanwhile, Solana’s early investor, Multicoin Capital, proposed a governance proposal aimed at modifying the network’s current inflation model and reducing the inflation rate of Solana’s native token, SOL. The proposal, designated as SIMD-0228, seeks to adjust SOL’s issuance rate to a dynamic and variable model, making it more market-driven.

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 disincentivizing 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 validator nodes that run the Solana software and help build the blockchain. The validator nodes then distribute these issuance rewards, as well as a portion of the MEV rewards, to the 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 does not change based on market conditions. However, if this proposal is approved, the network’s inflation rate will become variable and adapt based on market dynamics.

Why This Proposal Was Introduced and Its Potential Impact

Solana’s inflation rate was initially set at 8%, with a planned annual reduction of 15% until it reaches 1.5%. According to Dune Analytics dashboards, the current inflation rate of SOL is approximately 3.7%.

Solana co-founder Anatoly Yakovenko mentioned on the Lightspeed podcast that the idea of a fixed inflation rate was inspired by the Cosmos blockchain’s design, emphasizing that inflation is “merely an accounting mechanism.” Yakovenko is not particularly concerned about inflation, as the issuance of SOL does not create or destroy value but rather redistributes it. Newly minted SOL is allocated to stakers, while the holdings of non-stakers are 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 considered income.

While, from a technical perspective, issuance does not impose direct costs on the network, Multicoin argues that the negative perception caused by the dilution of unstaked SOL due to inflation is a valid reason to impose limitations on inflation.

“The current Solana inflation schedule is suboptimal given the current network activity levels and transaction fees because it issues more SOL than necessary to ensure network security,” wrote the proposal authors, Tushar Jain and Vishal Kankani. “This mechanism does not take network activity into account when determining the inflation rate.”

If the proposal is implemented and functions as expected, the authors believe it will “systematically reduce selling pressure while maintaining adequate staking participation.” They also suggest that “by aligning inflation adjustments with real-time market conditions, the issuance of SOL will better reflect the network’s actual economic and security needs.”

An obvious impact of this proposal is that SOL’s staking yield might decrease. Historically, SOL staking yields have remained above 7%, but if issuance is reduced, this yield will decline accordingly. Although the growth of MEV (Maximal Extractable Value) rewards may partially offset the effects of reduced inflation, overall, staking SOL could become less profitable.

What Does the Community Think?

This proposal involves various stakeholders within the Solana ecosystem, leading to diverse opinions and discussions within the community.

Messari analyst Patryk supports the proposal, arguing that it will transition Solana from “blind issuance” to “intelligent issuance,” which he views as a positive development. He believes SIMD-0224 is disadvantageous for validators, neutral for stakers, and beneficial for SOL holders.

“Currently, Solana’s total staking rewards far exceed the minimum necessary to ensure network security. The network has matured enough that it no longer requires such a high inflation rate. The SIMD-0224 proposal aims to shift Solana’s inflation model from a fixed schedule to a programmatic, market-driven model. This change will dynamically incentivize staking participation, similar to networks like @Polkadot. It will minimize inflation and align staking participation with the network’s Minimum Necessary Amount (MNA).”

Patryk believes this move could reduce selling pressure on SOL and lower the “tax burden” imposed on unstaked SOL holders.

On the other hand, Solana forum member Bji opposes the proposal, arguing that the primary purpose of inflation is to encourage more validators to participate and maintain network security. He points out that inflation rewards are already set to gradually decrease, with Solana’s long-term plan being to rely more on transaction fees to incentivize validators, thereby reducing the need for inflation-based rewards.

Currently, most validators earn more from transaction fees, priority fees, and MEV (Maximal Extractable Value) than from inflation rewards. Therefore, even if inflation rewards decrease, validator earnings would remain largely unaffected, while staker rewards might diminish.

Bji also asserts that if the proposed 50% reduction in inflation leads to a 50% decrease in staked SOL, it wouldn’t significantly impact the network because all participants would reduce staking proportionally. As a result, validators would maintain the same relative share of staked SOL, and their voting power would remain unchanged. Since voting power remains stable, the network’s security attributes would not be compromised. He argues that there is no need to set a specific inflation target for security purposes.

However, some community members are concerned that yield-focused stakers might lose interest if staking rewards are reduced by 50%. They warn that if total staked SOL drops by 50%, the cost of attacking the network would decrease significantly. “If only 20% of the total supply is staked, the staking distribution might remain balanced, but an attacker would only need to acquire and stake 10% of the total supply to disrupt the network.”

Currently, the community remains in a state of observation and discussion regarding the proposal. Key figures in the Solana ecosystem, including Solana founder Anatoly Yakovenko and Helius founder Mert, have yet to comment on the proposal. However, changes to Solana’s economic model are a major concern for all SOL holders. Blockworks data analyst Dan Smith believes that “Solana has officially entered an era of economic transformation.”

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