Can Solana's inflation model modification proposal further boost the price of SOL?

Recently, SOL's Market Cap has surpassed BNB again, becoming the fifth largest Market Cap Cryptocurrency. At the same time, Solana's early investor Multicoin Capital has released a Solana governance proposal aimed at modifying the network's current inflation model and dropping the inflation rate of its native coin SOL. The proposal number is SIMD-0228, with the goal of adjusting the issuance rate of SOL to a dynamic and variable mode to make it more market-oriented.

The proposal sets a 50% target staking rate to enhance network security and decentralization. If more than 50% of SOL is staked, the circulation will decrease, thereby suppressing further staking through drop yield; if less than 50% of SOL is staked, the circulation will increase to increase the yield and encourage staking. The minimum inflation rate will be 0%, and the maximum inflation rate will be determined based on the current issuance curve of Solana.

In Solana's mechanism, inflation refers to the issuance of SOL by the validating nodes that run Solana software and help build the blockchain network. These validating nodes then distribute these issuance rewards and a portion of the MEV rewards to the users who delegate their staked SOL.

Currently, Solana's inflation mechanism is fixed, which means that the rate at which SOL is issued as staking rewards is static and does not change based on market conditions. However, if the proposal is approved, the inflation rate of the network will become variable and will be adjusted according to market dynamics.

Why was this proposal released and its impact?

Solana's initial inflation rate was set at 8% with a plan to decrease it by 15% annually until it drops to 1.5%. According to Dune Analytics, the current inflation rate of SOL is approximately 3.7%.

Solana co-founder Anatoly Yakovenko said in the Lightspeed podcast that the idea of fixed inflation rate is borrowed from the design of the Cosmos blockchain, and inflation is just an accounting mechanism. Yakovenko is not particularly concerned about inflation because the issuance of SOL does not create or destroy value, but only redistributes value. Newly minted SOL will be distributed to stakers, while the holdings of non-stakers will relatively depreciate.

Nevertheless, Multicoin believes that dropping SOL inflation is necessary for the following reasons:

The newly issued SOL is only distributed to stakers, which may lead to centralization of the network; the high inflation rate drops the utility of SOL in DeFi and other scenarios, as the opportunity cost of not staking SOL is too high; in addition, only 9% of the staked SOL is liquid, dropping staking rewards may also reduce selling pressure in certain jurisdictions due to staking income being treated as income.

Although technically, issuance does not directly cost the entire network, the negative perception brought by the dilution of non-staked SOL due to inflation is seen by Multicoin as a sufficient reason to limit inflation.

"Given the current level of network activity and transaction fees, the existing Solana inflation plan is not ideal as it has issued more SOL than needed to secure the network," said proposal authors Tushar Jain and Vishal Kankani. "This mechanism does not take network activity into account and does not factor it into the inflation rate."

If the proposal is implemented and operates as expected, the author believes that this will "systematically reduce throwing and dropping under the condition of sufficient pledge participation", and "aligning inflation adjustments with actual deviations, the network issuance can better reflect the real-time economic and security conditions of the network".

This proposal also has an obvious impact - the staking yield of SOL may drop. Currently, the staking yield of SOL has always been above 7%, and if the circulation decreases, this yield will drop. Although the growth of MEV rewards may partially offset the impact of inflation reduction, overall, the yield of staking SOL may decrease.

How does the community view it?

This proposal involves the various interests of the Solana ecosystem, and the community's opinions are bound to generate a variety of voices.

Messari analyst Patryk believes that this proposal should be passed because Solana will evolve from 'blind issuance' to 'smart issuance', which will be a positive factor. He believes that the SIMD-0224 proposal is unfavorable for validators, has a neutral impact on stakers, and is beneficial for SOL holders.

"Currently, the total staking rewards for Solana have far exceeded the minimum required amount to ensure network security. The network is mature enough and no longer needs such a high inflation rate. SIMD-0224 proposes to change Solana's inflation rate from a fixed planned mode to a programmatic, market-driven mode."

Patryk believes that this move may reduce the selling pressure on SOL and drop the 'tax burden' currently imposed on SOL holders who are not participating in staking.

However, Solana forum member Bji does not support this proposal. He believes that the main purpose of inflation is to encourage more validators to participate and maintain the network's security, and the inflation rewards will gradually decrease. Because Solana's plan is to gradually shift more roles to transaction fees to incentivize validators, thereby reducing inflation rewards as a supplement.

Currently, most validators' earnings from transaction fees, priority fees, and MEV have far exceeded the portion from inflation rewards. Therefore, even if the inflation rewards drop, validators' income will not be greatly affected, but the rewards for stakers may decrease.

Bji said that if the inflation rate drops by 50% as stated in the proposal, it would result in a 50% decrease in the pledged SOL. This is not important because everyone will reduce their pledge in the same proportion. After all coin holders reduce their pledge proportionally, the relative pledge ratio held by validators remains the same as before, so there will be no substantial change in the voting rights of validators. When the voting rights do not change, the security properties of the network will not change. Therefore, there is no reason to set a specific currency inflation rate target for security purposes.

Some community members also expressed that profit-oriented stakers would lose motivation due to a 50% reduction in staking rewards. With a 50% decrease in total staked amount, the cost of attacking the network will also significantly drop. 'If only 20% of the total supply is staked, the distribution ratio of staking may remain unchanged, but this means that attackers only need to purchase and stake 10% of the total supply to shut down the network.'

Currently, the community is still in a wait-and-see and discussion attitude towards this proposal, and Solana's core figures such as Anatoly, the founder of Solana, and Mert, the founder of Helius, have not expressed their opinions on this proposal. However, the change of Solana's economic mechanism is a concern for every SOL holder. Dan Smith, a data analyst at Blockworks, believes that 'Solana is officially entering the era of economic change'.

(The above content is excerpted and reproduced with authorization from partner PANews, original link | Source: BlockBeats)

Disclaimer: The article represents the author's personal views and opinions, not the views and positions of Gate.io. All content and opinions are for reference only and do not constitute investment advice. Investors should make their own decisions and trades, and the author and Gate.io will not be held responsible for any direct or indirect losses incurred by investors.

<Solana's inflation model modification proposal, can it further boost the price of SOL? This article was first published in Blockcast.>