Original source: SolEasy Labs
Recently, a governance proposal SIMD-0228 of the Solana community has become the focus of attention. Once this proposal was put forward, it has set off countless heated discussions in the community. Some people applauded, while others were worried. What exactly is it? Simply put, SIMD-0228 attempts to upgrade Solanas SOL issuance mechanism from the original fixed inflation to a flexible dynamic adjustment, with the staking participation rate as an anchor, to reshape the network economic model. This is not only related to the value of SOL, but may also press an important key for the future development of the Solana ecosystem.
Why is SIMD-0228 of concern?
SIMD-0228 was jointly proposed by three heavyweights in the Solana ecosystem in January this year, including Tushar Jain and Vishal Kankani, co-founders of Multicoin Capital, one of the earliest and most important supporters of Solana. In addition, Max Resnick, chief economist of Anza, the core development team of Solana, also expressed his strong support.
Currently, Solanas inflation mechanism uses a fixed schedule, with the annual inflation rate decreasing year by year from the initial 8%. The current inflation rate is about 4.669%, and the goal is to stabilize at 1.5% in the long term. However, this fixed model lacks flexibility and cannot be flexibly adjusted according to the actual needs of the network or the staking participation rate.
In the past six months, Solanas on-chain activities have been booming, creating more than $1.5 billion in REV (network revenue = handling fees + Tips), showing its strong demand for network use. At the same time, Solanas staking rate has also reached a historical high of 65.7%, which has created favorable conditions for reducing inflation. Therefore, the proposer believes that the inflation strategy should be optimized, and no longer blindly issuing excess SOL can also allow the network to develop more healthily.
The core of SIMD-0228 is to introduce a smart inflation mechanism, which dynamically adjusts the issuance of SOL according to the pledge rate. The specific goals include:
Dynamic incentive staking: When the staking rate decreases, the system will automatically increase the issuance of SOL to encourage more users to participate in staking and ensure the security of the network.
Minimum Necessary Inflation (MNA): The system will minimize unnecessary SOL issuance and only issue the minimum amount of tokens required to maintain network security to avoid market selling pressure.
Network security: Ensure the security of the network while releasing more capital into the DeFi ecosystem and promoting the healthy development of the ecosystem.
The proposer believes that this adjustment can allow Solana to get rid of the old path of inflation and move towards a more sustainable development track. It sounds perfect, but what will happen after it is implemented? What impact will it bring?
What impact might SIMD-0228 have?
If SIMD-0228 passes successfully, Solana’s economic model will undergo major changes, and the impact will spread to the entire ecosystem.
1. Impact on the Solana Network
After the proposal is passed, based on the current staking rate of 65%, the inflation rate may drop sharply from the current 4.5% to 0.87%, and the staking rewards will shrink significantly. This means that the income of validators will rely more on MEV (miner extractable value) rather than inflation rewards. For ordinary holders, SOL dilution will be reduced, selling pressure will be reduced, and the imagination space for price increases will be greater.
But for validators, especially small validators, low returns may make it difficult for them to maintain operations. David Grider, former head of Grayscale Research, created a model predicting that Solana may lose 50 to 250 validators, and the risk of network centralization will increase. Therefore, this is actually a game of security and efficiency.
2. Impact on ecosystem builders
The reduction of staking rewards will leave more SOL with nowhere to go, and eventually flow into the DeFi ecosystem to increase liquidity. Ian Unsworth said that this will drive the adoption rate of Liquid Staking Tokens (LST) to increase, creating a positive outlet for DeFi protocols that currently have liquidity (such as JitoSOL), and will also benefit VRT built on its heavy staking platform (such as Renzo, Fragmetric and Kairos).
In addition, this will also lead to a direct link between revenue and network usage, with most of the rewards coming from priority fees and Jito fees. Verification tips may have a potential flywheel effect, with high chain usage = higher revenue = higher chain usage due to the injection of wealth effect. At the same time, low basic revenue will force developers to create yield-enhanced products, ultimately leading to an explosion of staking derivative products.
Editors Note: Jito Validator Tips is a feature launched by Jito Labs, the MEV infrastructure protocol of the Solana ecosystem. It aims to optimize the validators profit distribution mechanism and distribute part of the MEV income (such as profits generated by arbitrage and liquidation) directly to the validator in the form of tips.
But everything has two sides. Reducing the issuance of new tokens may limit the funds and liquidity of ecological projects and developers, potentially slowing down innovation and growth, which may affect the overall vitality of the ecosystem. Moreover, due to the reduction of network validators, if network security is damaged, it may directly affect the development of ecological projects and reduce user confidence.
3. Impact on holders
For SOL holders, smart inflation greatly enhances the controllability of Solanas inflation, which is particularly attractive to institutional capital. More funds may flow to DeFi protocols to pursue high returns, and the long-term price performance of SOL is worth looking forward to. The model can also maintain a competitive rate of return based on the staking participation rate and enhance the value of assets. But for large investors, the reduction in staking income may make them re-evaluate: continue staking or turn to other income channels? This is not only a technical adjustment, but also a reconstruction of investment logic.
SIMD-0228 Game of Parties
The heated discussion on the SIMD-0228 proposal reflects the complexity of the ecosystem. The views of all parties mainly show support from large investment institutions, differentiation among the validator group, and complex positions of developers and ecosystem builders.
Tushar Jain and Vishal Kankani, the two proposers of the SIMD-0228 proposal, both believe that SMID-0228 will release more SOL into the DeFi ecosystem, provide more opportunities to develop and promote new DeFi products and services, and increase liquidity and user engagement.
Solana co-founder Anatoly Yakovenko also expressed support for the proposal, arguing that a pragmatic launch gives Solana “the opportunity to correct the mistakes of our young people.”
Ben Hawkins, head of staking at the Solana Foundation, supports having dynamic $SOL issuance to reduce inflation.
Max Kaplan of Sol Strategies proposed the concept of it is better to be roughly right than exactly wrong, emphasizing the flexibility of market-driven mechanisms.
Kamino co-founder Marius pointed out that staking encourages hoarding and reduces financial activity and supports reducing inflation to enhance liquidity.
Therefore, for large investment institutions, the SIMD-0228 proposal can shape the narrative of market-driven efficient network to attract more institutional investment. At the same time, the reduction in inflation rate will help reduce token dilution and maintain the value of their holdings.
Despite the optimism of experts, Solana community members have expressed their concerns. For example, validator Xen said that if rewards end up favoring those with more SOL, smaller validators may find it difficult to make money, thus falling into an inflationary spiral.
Xens concerns are not unfounded. Solanas MEV revenue in Q4 2024 reached a staggering $430 million, more than 10 times that of Q1. Therefore, even if the inflation rate is significantly reduced, large professional validators can make up for the reduced revenue through MEV and transaction fees and maintain profitability.
For small and medium-sized validators, there are still 250 small validators that are not profitable and can only rely on the Solana Foundation delegation plan to stay online. The model established by David Grider, a former Grayscale researcher, shows that after the SMID-0228 proposal is passed, Solana may lose an additional 50 to 250 validators under different revision scenarios.
Community member Leapfrog admitted in the Solana developer forum that the proposal will have a disastrous impact on Solana. He believes that if inflation rises when investment confidence is low, that is, investors withdraw their funds and sell, this will intensify panic. No matter how big the bet return is, volatile assets are not suitable for long-term large investors.
The managing partner of Multicoin Capital said that it is a consensus that the current inflation rate is too high and action should be taken quickly. He is not worried about the security of the consensus, but admits that the profitability of validators may be affected. He expects that some validators may withdraw from the network, and may even trigger a zero commission competition, further worsening its economic situation.
He emphasized that excessive caution could lead to analysis paralysis and hinder Solanas development, so it should keep moving forward quickly to avoid falling into a situation similar to Ethereum. This proposed reform essentially represents a rebalancing of power between large token holders, validators, and ecosystem builders, so this vote is also considered one of Solanas most important decisions.
Can SIMD-0228 be further optimized?
SIMD-0228 has undoubtedly caused heated discussions in the entire Solana ecosystem. If it can be passed, it means that it is what everyone wants and a consensus has been reached in the short term. However, after running for a period of time, new problems will be discovered and new adjustment proposals will be put forward.
If the vote fails, given the current popularity of the proposal, I am afraid that new proposals will be put forward to modify Solanas economic model, because the current main contradiction is caused by the mismatch between Solanas development needs and Solanas economic model. As long as this contradiction exists, there will be enough motivation in the ecosystem to promote new proposals.
Through the opinions of all parties on SIMD-0228, we can also perceive that most people did not discuss whether this contradiction itself exists, but discussed the specific adjustment methods in the SIMD-0228 proposal. Therefore, new proposals are likely to emerge in an endless stream.
So, if we want to put forward new proposals to resolve current conflicts, where can we start?
First of all, some modifications are made to the parameters mentioned in SIMD-0228. Some of the opposition to SIMD-0228 comes from the fact that its changes are too drastic, and too large a change will have a greater impact on the ecosystem.
If some of the parameters are adjusted to slow down the overall changes, such as changing the lowest inflation rate in SIMD-0228 from 0% to around 2%, the reduction in validator income will be smaller so that they will not die, and the adjustment of the staking rate will be smaller. Perhaps a more moderate version of SIMD-0228 will be proposed.
Secondly, redesign the scheme for dynamically adjusting the inflation rate. For example, Polkadot is also a mechanism for dynamically adjusting Staking income. It designs an optimal Staking ratio. When there is a difference between the actual Staking ratio and the optimal Staking ratio, the staking participants will not be able to obtain all inflation rewards because part of it will be remitted to the treasury. Through this mechanism, people can be more inclined to make the Staking ratio close to the optimal Staking ratio, which is the most cost-effective for Staking participants, thereby regulating the Staking ratio of the entire network.
However, Polkadot’s mechanism will involve transferring part of the inflation funds to the national treasury, which will add additional complexity to governance. But it is undeniable that there are indeed some mechanisms that can dynamically adjust Staking returns, thereby affecting the development of the entire ecosystem. Solana can learn from this.
As for the inflation funds that Polkadot remits to the treasury, combined with Solanas design of not having a treasury, it can be considered to burn them, thereby adjusting Solanas staking rate to a relatively ideal ratio (such as 33%). At the same time, when the staking ratio is not optimal, Solanas total inflation rate will be reduced due to additional burning, and the staking income will also be reduced.
The above method is still a plan to dynamically adjust the inflation rate itself. It can also achieve similar effects by dynamically adjusting other parameters.
For example, we can consider adjusting the initial inflation rate directly to a fixed value of 3%, but we can dynamically adjust the current handling fee burning ratio. The current handling fee is 50% burned, and 50% is given to the validator. We can dynamically adjust this 50% ratio, increase the burning when necessary or reduce the burning when necessary, so as to ensure that the Staking income will not be too high to affect the development of the ecosystem, and use the power of the ecosystem to reduce inflation.
Of course, if you feel that the speed of directly lowering inflation from the current 4.5% to 3% is too fast, you can also consider setting it to a reduction of 0.5% every six months, and reaching the end point of 3% in one and a half years. This can slow down the impact of the adjustment on the ecology.
The above is just some divergent thinking on SIMD-0228, but it is enough to show that there are many ways to adjust Solana’s economic model. As one of the most successful public chains at present, the adjustment of Solana’s economic model is an important experiment in the blockchain industry.
Currently, SIMD-0228 is being voted on, and the number of votes has exceeded 33% to reach the quorum. The current approval rate has exceeded 70%, and the voting will continue until Epoch 755. If it is successfully passed, it will provide a reference paradigm for dynamic inflation for other public chains. Even if it is unsuccessful, this governance battle has profoundly changed the narrative of Web3: the future of the blockchain economy lies in the delicate balance between code rules and human incentives, and Solana is undoubtedly leading the development of the industry.
