Recently, the Solana governance forum initiated a proposal named SIMD-0228, which aims to dynamically adjust the inflation rate, reducing the annual issuance of SOL by 80% and directing funds from staking to DeFi. However, this seemingly “intelligent issuance” blueprint has sparked intense debates within the community regarding the “inflation spiral” and the competition of interests…
(Background: Solana’s price plummeted below $140, halving from its historical high! With 11.2 million SOL unlocking on March 1, will it further crash?)
(Additional context: A conversation with Solana founder: How to maintain faith when the entire industry sentences Solana to “death”?)
Recently, the Solana governance forum initiated a proposal named SIMD-0228, which aims to dynamically adjust the inflation rate, reducing the annual issuance of SOL by 80% and directing funds from staking to DeFi. However, this seemingly “intelligent issuance” blueprint has sparked intense debates within the community regarding the “inflation spiral” and the competition of interests—when the staking rate falls below a critical point, higher inflation may undermine market confidence. Moreover, the income structure of validators and the distribution of benefits among ecosystem participants have become invisible explosives in this token economic experiment.
New proposal may reduce inflation by 80%, decreasing annual issuance by 22 million SOL
The issuance mechanism of Solana’s token SOL has always followed a fixed timeline, where the inflation rate declines from 8% at a decreasing rate of 15% per year until reaching a target of 1.5%, with the current inflation rate at 4.694%. Under this inflation rate mechanism, the number of tokens issued this year is approximately 27.93 million, with a staking rate of around 64%. In comparison, Ethereum’s inflation rate is currently about 0%, with a staking rate of around 30%. The inflation model of SOL tokens is evidently less favorable for token value preservation, and the excessively high inflation rate has led to a substantial number of tokens being staked for higher yields, which is unfavorable for the development of the DeFi ecosystem.
The proposal argues that MEV income has become the main source of income for validators in the Solana network, and reducing staking yields will not have a significant impact on profits. “In simple terms, it is foolish issuance. Given Solana’s thriving economic activity, it makes sense to develop a monetary policy for the network to achieve intelligent issuance.” The proposal suggests a threshold, initially assumed to be 50%, where when the staking rate exceeds 50%, the inflation rate decreases, thus reducing staking rewards from the network. Conversely, when the staking rate is below 50%, the inflation rate will increase, expanding rewards to incentivize more funds to stake.
Subsequently, forum users questioned the lack of rigorous calculations for the 50% threshold, deeming the setting too hasty. The proposers then provided a new algorithmic curve, designating a staking rate of 33% as a boundary, where when the staking rate exceeds 33%, the annual inflation rate will be lower than the current inflation rate. According to calculations by PANews, with the current staking rate of 64%, under the new token issuance curve, the annualized inflation rate would drop from 4.694% to 0.939%, a reduction of approximately 80%. If the proposal passes, under the current staking rate, the annual issuance of SOL will decrease from 27.93 million to 5.59 million.
However, this assertion in the proposal seems to have not achieved consensus within the forum, with numerous comments suggesting that if the plan is approved, reality may not unfold as ideally expected. For instance, when the staking rate declines, the increase in the inflation rate may further lower market expectations for the token, possibly leading to further sell-offs of unstaked tokens and causing greater uncertainty.
Calculating based on a staking rate of only 25%, PANews found that this would yield 44.13 million tokens in inflation, which is significantly higher than the current inflation rate. If indeed trapped in this inflation vortex, the result may likely be counterproductive. As stated in the proposal, the current source of income for validators is MEV income. This phenomenon is primarily due to the active trading on the current Solana network, where many MEME players have a demand for transaction speed and protection against sandwich attacks, resulting in a high proportion of MEV income. If the overall trading volume of the network declines in the future, the proportion of MEV income may struggle to remain the main source of income for validators. At that time, if combined with the dual blows of inflation and price decline, it may further dampen staking enthusiasm, leading to a reverse spiral of rising inflation and declining staking.
Validator giants remain collectively silent, possibly due to the interests of large token holders
The proposal was initiated by Vishal Kankani, an investor from Multicoin Capital, which is an early investor in Solana and led a $20 million Series A financing round in 2019. Additionally, they hold a substantial amount of SOL tokens, having opted for SOL tokens instead of equity during early investments. From this background, it can be seen that Vishal Kankani represents the interests of large SOL token holders, who are more sensitive to the effects of inflation on token market prices.
Interestingly, as of February 26, major validators on the Solana network, including Helius, Binance Staking, and Galaxy, have not publicly stated their positions regarding this proposal. The founder of Helius, who frequently comments on the development of the Solana ecosystem, merely shared related content about this proposal, stating that selling SOL tokens now is foolish.
In fact, if this proposal passes, it may not bode well for validators like Helius, who return 100% of MEV income to stakers. Currently, due to the lack of income from MEV, Helius may rely more on the income from staking itself. Overall, this proposal represents the interests of large SOL token holders, who prefer to reduce inflation to achieve value stability. Furthermore, from an ecosystem perspective, the current staking yield on the Solana network is approximately 7.03%, while under the new proposal, the yield at the same staking rate would drop to 1.41%, a decrease of nearly 80%. This is not favorable for large validator nodes that hope to gain risk-free returns through staking.
Of course, the proposal argues that it is precisely the decline in staking yields that will stimulate these validators to invest more of their tokens into the DeFi ecosystem, potentially further enhancing the prosperity of Solana’s DeFi ecosystem.
This token economic reform within Solana is essentially a power rebalancing among large token holders, validators, and ecosystem builders. If the proposal passes, the 7.03% staking yield may plummet to 1.41%, forcing validators to shift from relying on inflation rewards to focusing on MEV and transaction fees—this is both an opportunity and a gamble. If DeFi can leverage this to attract billions of dollars in idle liquidity, Solana may experience explosive innovations akin to Uniswap and Aave; however, if the market sells off due to declining yields, the issuance of 44.13 million tokens at a 25% staking rate may drag the network into a “inflation – sell-off – further inflation” death spiral.
Currently, the silence of top validators like Helius hints at the subtle tension in the interest chain—when the business model of returning 100% MEV encounters a halved base income, the narrative of “decentralization” within the ecosystem may face harsh realities. Meanwhile, the position of Multicoin Capital as an early whale reveals the deeper logic of this game: in the eyes of institutional investors, the value storage property of SOL takes precedence over network security needs. In the coming months, as the voting date on March 7 approaches, Solana’s fate will no longer be dictated by code but will depend on whether the community can find that precarious balance between idealism and capital rationality.
