Solana currently operates with an inflation system that distributes new SOL tokens as rewards to validators and stakers.
This helps maintain network security and incentivises participation but also increases the overall supply of SOL over time.
Those who stake receive rewards that counterbalance inflation, while those who do not see their holdings’ value diluted. Over the long term, this concentration of tokens among stakers could create concerns about fairness and network ownership.
To address this, the SIMD 228 proposal introduces a more responsive system where inflation rates adjust based on staking participation. Instead of a fixed inflation rate, the proposal suggests reducing inflation dynamically, depending on how much SOL is staked.
This could help stabilise inflation while making Solana’s economy more flexible. Additionally, the changes could encourage more SOL to be used in DeFi applications rather than being locked in staking.
How Solana’s Inflation Works
Solana’s inflation system was designed to secure the network by rewarding those who stake their SOL. The more SOL staked, the higher the security, as validators have more at stake.
However, a side effect of this system is that inflation benefits stakers at the expense of those who simply hold SOL.
Since new tokens are continuously created, those who do not participate in staking experience a gradual decrease in the relative value of their holdings.
Another issue with high inflation is its impact on market perception. When too many new tokens enter circulation, it can lead to concerns about long-term value. Investors may hesitate to hold SOL if they believe their holdings will be diluted over time.
Additionally, the current inflation model does not take market conditions into account, meaning it continues at a fixed rate regardless of changes in staking participation.
SIMD 228 introduces a system where inflation rates adjust dynamically based on staking activity. If more people stake their SOL, inflation will decrease faster. If fewer people stake, the rate of inflation stabilises at a higher level.
This adjustment would prevent inflation from being unnecessarily high while still ensuring that staking remains an attractive option for those securing the network.
There have been different scenarios predicted based on this model. If the staking ratio drops slightly in response to reductions in inflation, Solana’s annual inflation rate could stabilise at around 0.75% within two months.
However, if staking participation is more sensitive to changes in rewards, inflation could rise to 2.72% within just 30 days. These scenarios highlight the importance of carefully balancing staking incentives with inflation control.
What Would Change If SIMD 228 Is Implemented?
If this proposal is implemented, one of the biggest changes would be a shift in how SOL is used across the network.
Right now, staking provides some of the highest returns for SOL holders. For example, staking SOL through JitoSOL currently offers an annual return of over 9%, while lending SOL through Kamino’s main pool provides around 5%.
Since staking rewards come from inflation, reducing the issuance of new SOL would naturally lead to lower staking yields.
If inflation were to drop significantly or even reach zero, staking yields could fall to around 3%. This means that lending and liquidity pools in DeFi platforms might become more attractive than staking, leading to a shift in how SOL is used.
More SOL could flow into DeFi applications, increasing liquidity and creating new opportunities for decentralised finance on Solana.
Another major impact of SIMD 228 would be on transaction fees. Since staking rewards would decrease, Solana would need to rely more on transaction fees to compensate validators.
This is where another proposal, SIMD 123, becomes important. This proposal would allow validators to share priority fees with stakers, ensuring that even if inflation decreases, staking remains a viable option.
There is also the question of how SIMD 228 interacts with SIMD 96. This proposal suggests that priority fees should no longer be burned but instead given entirely to validators.
If this happens without SIMD 123, validators could end up capturing most of the fees, leaving less incentive for people to stake. This is why many believe SIMD 96 should only be implemented alongside SIMD 123 to ensure that rewards remain fairly distributed.
If these proposals are implemented together, Solana’s economic model could shift from being heavily reliant on inflation-based rewards to a system where transaction fees play a larger role.
This would make the network more sustainable in the long run and reduce the need for continuous token issuance.
Conclusion
Solana’s current inflation model has been effective at securing the network, but it also has drawbacks. The continuous issuance of new SOL dilutes non-stakers and raises concerns about long-term value.
SIMD 228 offers a way to balance inflation by making it responsive to staking participation, ensuring that it decreases as more SOL is staked.
If implemented, this proposal could lead to significant changes in Solana’s economy. Staking yields would decrease, making DeFi applications more attractive for SOL holders.
Validators and stakers would also become more dependent on transaction fees, which means other proposals like SIMD 123 would be necessary to maintain fair rewards.
These adjustments could create a more balanced and sustainable system for Solana, shaping its future economic model in a way that benefits both stakers and the broader DeFi ecosystem.