Solana-simd-0228-a-risky-tokenomics-revamp
Solana is standing before a potential upgrade in its economic model. Multicoin Capital, a thesis-driven investment firm, has submitted a proposal to overhaul Solana’s token emission system. The goal is simple: reduce inflation and stabilize the network.
The Proposal: SIMD-0228
Multicoin Capital proposes a shift in Solana’s tokenomics, namely SIMD-0228, the proposal consists of going from a fixed-rate token emission system to a dynamic, variable-rate system. Essentially, the proposal aims to balance validator rewards while preventing excessive dilution for non-staking SOL holders. It also looks to reduce the network’s reliance on inflation by leveraging additional revenue sources, such as MEV (Maximal Extractable Value).
Here are the fundamentals for the proposal:
The token issuance would be adjusted based on the network’s active stake
50% Target Staking Rate: If staking participation drops below 50%, the system would increase token issuance to attract more stakers and enhance security.
Cap Above 50%: If staking surpasses 50%, token issuance is capped, preventing unnecessary inflation and helping protect the token’s value.
It’s important to note that Solana validators earn rewards through multiple channels:
Staking: from issuance of new tokens
Votes: payment for voting on blocks
Fees: transaction fees from blocks
These rewards are paid out every epoch, which is approximately every 2 days, or 432,000 blocks
SIMD-0228’s Implications for Stakeholders
The voting takes place on March 9th, 2025. And it’s one of the biggest potential changes for Solana, which has strong implications for both validators and stakers.
Implications for Stakers
Shifting Reward Structure
Under the SIMD-0228 proposal, inflation-based rewards will adjust depending on the network’s staking ratio. If fewer tokens are staked, inflation goes up (thus increasing rewards), and if more tokens are staked, inflation goes down.
Smaller stakers, who typically rely on inflation rewards almost entirely, could be more vulnerable if rates decrease as they likely lack the means to capture additional revenue (from MEV or priority fees), making them more vulnerable to changes in the inflation rate.
Need for Strategy
Stakers may be required to monitor on-chain conditions more closely, evaluating whether it’s more profitable to remain staked or not.
Potential for Centralization
If smaller stakers find the new system unprofitable, they might opt out from staking or delegate to large validators. This could, in theory, concentrate more stake in fewer stakeholders
Implications for Validators
Adaptation to a new System
Validators who rely mainly on inflation rewards could see their income swing more than before. High staking participation would mean lower issuance, which would reduce overall validator rewards.
In contrast, if the staking ratio drops, validators could end up earning more rewards.
MEV and Priority fees Become More Important
SIMD-0228 assumes that external revenue sources (like MEV) can help make up for a reduced inflation rate. Validators with advanced setups or partnerships to capture MEV effectively will have an edge.
Now, let’s assess how SIMD-0228 would function in the context of Solana’s current economic landscape. By examining key metrics such as the network’s staking ratio and the contribution of MEV revenue, we can evaluate the potential benefits and risks of shifting to a dynamic, variable-rate emission system. This helps to highlight not only the theoretical implications, but also the practical ones based on recent statistics.
Solana’s Current Economic Model
First, let’s have a quick refresh of what Solana’s security and economic model looks like:
Proof-of-Stake Consensus Mechanism
Solana operates on a PoS mechanism which requires stakers and validators to secure and run the network. These network stakeholders are incentivized to secure the network.
Token Supply and Inflation
Solana’s token supply is inflationary, meaning that new tokens are constantly minted. Minted tokens are used to reward stakeholders, alongside 50% of transaction fees generated by the network while the other 50% of transaction fees is burned. Additionally, Solana’s inflation rate is designed to decrease over time (from 15% annually down to 1.5%).
Supply net change and Annualized Inflation. 21co Dune Dashboard
Now let’s look at Solana's Staking Ratio over the last 30 days. The chart below shows that Solana’s staking ratio has been around 68% during this period. Under the proposed upgrade (SIMD-0228), since the ratio is above 50%, inflation would’ve been reduced to avoid unnecessary dilution over the last month.
Active Validators and Stake Ratio. 21co Dune Dashboard
MEV Rewards
MEV Rewards Distribution. Flipside MostlyData_
The chart above shows how Jito tips (light blue bars) and transaction fees (dark blue bard) have contributed to validator rewards over the past month, accumulating 720,000 SOL in total paid out. This showcases the proposal’s assumption that external revenue can help support stakers (validators and delegators). Nevertheless, it also highlights the variability of these income streams, as if tip/fee volume declines, the network could see a sudden drop in revenue accrued to validators and stakers, which would in turn, potentially weaken the network’s security if inflation isn’t enough to reward stakeholders.
Although Jito generates a considerable amount of revenue, primarily through MEV tips, only around 4% of the total SOL stake actually goes through Jito. The great majority of SOL (around 94%) remains natively staked. This means that most validators rely mainly on SOL inflation.
The aforementioned points emphasize that:
External revenue streams alone are probably not enough to support the entire network.
Even if MEV and other fees are considerable, they only benefit a small fraction of stakers.
Since most rely on inflation-based rewards, if inflation rates are significantly reduced, those who aren’t capturing significant MEV or fee-based income could see a sharp drop in earnings, potentially undermining the incentive to stake and weakening network security.
The Community’s Take
Based on the proposal’s official documents, not all stakeholders are convinced that this approach for rewards is the right move. These are some of the concerns being brought up:
Some members doubt the assumption that staking percentages correlate reliably with economic activity. They point out that over the past year, while staking APRs have increased, the overall percentage of SOL staked has actually dropped (from 69% to 65%) suggesting that other factors are not being considered.
Lower inflation might mean fewer incentives for staking, potentially reducing overall network security. If too few tokens are staked, it becomes easier for an attacker to gain control, even if the relative stake distribution remains unchanged.
Users also point out that the proposal relies on the other income sources, like MEV, to support stakers. However, this income isn’t guaranteed and could disappear, which would weaken the model, reward validators unfairly, and negatively impact network security.
As mentioned before, current network and protocol conditions validate some of the stakeholders’ concerns, mainly regarding the small reach of MEV rewards among only a few validators, and the fact that most of them still depend on inflation-based rewards. In the end, if inflation is reduced, even temporarily, many participants could be undercompensated which could potentially lead to a decrease in network security, which are the exact risks outlined by some stakeholders.
In conclusion, SIMD-0228 proposal represents a bold attempt to align token issuance with real-time network conditions. By dynamically adjusting inflation based on staking activity, the proposal seeks to maintain security, prevent dilution, and potentially boost token value. However, the success of this proposal depends on a range of factors, from reliable MEV revenues to how accurately staking rates reflect economic health.
Sources
https://github.com/solana-foundation/solana-improvement-documents/pull/228
https://dune.com/21co/solana-key-metrics
https://dune.com/ilemi/solana-staking
https://solanacompass.com/tokenomics
https://solanacompass.com/statistics/staking