Overview

On January 16, 2025, cryptocurrency investment firm Multicoin Capital proposed governance proposal SIMD-0228, suggesting a change to Solana’s current fixed inflation model to a dynamic mechanism to enhance network security and decentralization.

Source: github.com

1. Background and Reasons for the Proposal

Currently, Solana’s fixed token issuance mechanism faces several challenges. While it controls token issuance through a fixed inflation rate, this inflexible model cannot adequately respond to market demands.

When market conditions fluctuate, the unchanging token issuance may either compromise network security or create excessive SOL supply in the market, potentially destabilizing prices.

Core of the Current Proposal:
The current proposal utilizes staking rate as a key metric to dynamically adjust token issuance, to maintain network security and stability.

When the staking rate drops, the system increases inflation to encourage more users to stake, strengthening network security. Conversely, when the staking rate rises, inflation decreases, reducing SOL supply and supporting price stability.

2. Core Advantages of Dynamic Inflation Mechanism

(1) Enhanced Network Security
When the staking rate drops, the system automatically increases SOL issuance to enhance staking rewards. This incentivizes more users to stake their tokens, strengthening network security and reducing attack risks. For example, if the staking rate falls to 40%, the mechanism increases rewards to maintain network stability.

(2) Reduced Market Selling Pressure
When the staking rate is high, SOL’s inflation rate will correspondingly decrease, reducing new SOL supply in the market, thus alleviating selling pressure and maintaining relatively stable prices.

(3) Promoting Economic Sustainability
In the future, if MEV (Maximum Extractable Value) rewards become sufficiently high, Solana may no longer rely on inflationary issuance, instead supporting network operations through market-driven mechanisms, making the entire economic system healthier and more sustainable.

(4) Protecting Long-term Token Holders’ Interests
High inflation leads to dilution of unstaked users’ asset value, while the dynamic inflation rate adjustment mechanism can reduce unnecessary SOL issuance, lowering dilution risk for long-term holders.

(5) Strengthening Solana Ecosystem Development
This mechanism makes SOL issuance more flexible, helping to stabilize the market while supporting the Solana ecosystem’s long-term growth. As MEV rewards increase, SOL could potentially achieve “zero inflation,” enhancing the network’s sustainability.

SIMD-0228’s core objective is to create a more adaptable inflation mechanism that balances network security, market stability, and sustainable development. By dynamically adjusting SOL issuance, the system can automatically optimize incentives under varying market conditions, improving decentralization while reducing dilution risk for long-term holders.

If approved and implemented, this proposal could guide Solana toward a more stable and healthier economic system—potentially achieving zero inflation as MEV rewards grow. This would enhance SOL’s appeal as an asset while strengthening the Solana ecosystem, creating a stronger foundation for future Web3 infrastructure.

3. Specific Adjustments

Target Staking Rate: 50%

If the staking rate exceeds 50%, SOL issuance will be reduced, lowering staking rewards to prevent excessive concentration of staking among a few holders.

If the staking rate falls below 50%, SOL issuance will increase, raising staking rewards to incentivize more users to participate in staking.

Inflation Rate Range:

Minimum is 0%, ensuring no unnecessary token issuance.

Maximum inflation rate will be adjusted according to the existing Solana issuance curve.

4. Alternative Options

Fixed New Issuance Rate:

Setting a new fixed inflation rate, but lacking market adjustment capability and inability to respond flexibly to changes in staking rate.

MEV-Based Issuance Adjustment:

Adjusting issuance based on MEV rewards, but this approach might lead to hidden MEV profits, affecting the mechanism’s effectiveness.

Through this dynamic adjustment mechanism, Solana will be better able to balance token supply, network security, and market liquidity, thereby promoting long-term sustainable development of the ecosystem.

Source: github.com

Background

As of February 10, 2025, Solana uses a fixed inflation rate model, initially set at 8%, decreasing by 15% annually, eventually reaching 1.5%. The current SOL inflation rate is approximately 4.728%.

Source: solanacompass.com

On the Lightspeed podcast, Solana co-founder Anatoly Yakovenko explained that the fixed inflation rate concept came from Cosmos’s design and serves mainly as an “accounting mechanism.” In his view, SOL issuance doesn’t create or destroy value—it simply redistributes it from non-stakers to stakers through relative depreciation. As such, he doesn’t consider inflation a major concern.

However, Multicoin considers reducing SOL inflation crucial for the following reasons:

1. Reducing Network Centralization:

Since new SOL is only distributed to stakers, this may lead to a few large holders accumulating more network stake, thereby exacerbating centralization issues. Reducing inflation helps mitigate this trend.

2. Enhancing DeFi Application Appeal:

High inflation rates increase the opportunity cost of unstaked SOL, reducing its liquidity and usability in the DeFi ecosystem. Lower inflation helps strengthen SOL’s competitiveness in DeFi applications.

3. Reducing Market Selling Pressure:

High staking rewards may force some holders to sell SOL due to tax policies, either to pay taxes or reduce tax burden. Lower inflation helps reduce this external selling pressure.

Source: solanacompass.com

According to Multicoin proposal authors Tushar Jain and Vishal Kankani, Solana’s current inflation mechanism lacks the ability to monitor and factor in network activity. “Given the current network’s transaction activity and fee revenue, the current inflation schedule exceeds what’s reasonably needed to maintain network security.”

If the proposal is implemented and runs as expected, SOL staking yields may decrease. As of February 10, 2025, SOL staking returns have historically maintained between 7-12%, and if issuance reduces, yields will decrease accordingly. Although growth in MEV (Maximum Extractable Value) rewards may partially offset the impact, overall returns may still trend downward.

Source: solanacompass.com

This adjustment has precedents in the crypto industry. For example, Ethereum successfully shaped the “Ultrasound Money” narrative after transitioning to PoS and reducing issuance. At the same time, Cosmos, despite using a market-driven inflation mechanism, still debates the optimal inflation range in its community, with ATOM dropping 34% over the past year.

Notably, Multicoin partner JR Reed emphasizes that the proposal’s inspiration primarily comes from the funding rate mechanism of perpetual contracts rather than Ethereum’s inflation control model.

Soure: github.com

Comparison of Old and New Inflation Models

If the new SOL inflation proposal passes, it may slow down the supply growth rate and enhance token scarcity, which could stabilize or increase prices.

At the same time, the decrease in staking returns may improve DeFi ecosystem liquidity and promote lending market expansion. The validator incentive mechanism will shift from inflation subsidies to transaction fee revenue, improving the economic model’s sustainability. Overall, the new model helps reduce inflationary pressure, enhance market confidence, and promote the long-term healthy development of the Solana ecosystem.

Impact on Different Ecosystem Participants

The new SOL inflation proposal reduces the supply growth rate and enhances scarcity, helping to stabilize prices. Lower staking returns may drive capital into DeFi, increasing liquidity and lending market vitality. Validator incentives shift toward transaction fees, improving economic sustainability, while DeFi projects benefit from increased liquidity. Overall, this proposal is expected to optimize capital flow, enhance market confidence, and promote lthe ong-term development of the Solana ecosystem.

Historical Inflation Cases

Ethereum EIP-1559 Impact and Market Response

1. Supply Reduction and Deflationary Effect
   Transaction fees are partially burned, reducing ETH’s supply growth rate and even achieving net deflation during periods of high burn.
   Narrative strengthened: “Ultrasound Money,” enhancing ETH’s store of value properties.

2. Long-term Price Benefits
   While ETH price didn’t surge immediately after EIP-1559 implementation, it laid foundation for long-term growth.
   2023-2024, ETH stabilized above $2,000, market acknowledged its scarcity.

3. More Transparent Fee Mechanism, but Gas Still High
   Fees became more predictable, but remained expensive during high demand, driving L2 development.

4. L2 Ecosystem Expansion
   EIP-1559 didn’t lower Gas fees itself, L2s (like Arbitrum, Optimism, Base) became mainstream solutions.
   Overall, EIP-1559 enhanced ETH scarcity, strengthened its store of value properties, benefited long-term price, and accelerated L2 development.

Source: github.com

Cosmos Dynamic Inflation Mechanism: Lessons Learned

Mechanism Design

Inflation Range: Fluctuates between 7% - 20%, depending on whether ATOM staking ratio approaches the 67% target.

Adjustment Logic:

Staking ratio below 67% → Inflation rate increases, incentivizing more ATOM staking.

Staking ratio above 67% → Inflation rate decreases, reducing new token issuance.

Successful Experiences

1. Flexible Supply Adjustment, Long-term Staking Incentives
   Maintains stable staking ratio and enhances network security through inflation rate adjustments.

2. Staking Rewards Drive Long-term Holding
   ATOM staking yields returns, reducing selling pressure and strengthening community consensus.

3. Decentralized Governance Drives Mechanism Optimization
   Parameters adjusted through on-chain governance, such as Proposal 82 discussing ATOM economic model optimization.

Issues and Challenges

1. Inflation Suppresses Price Growth
   High inflation dilutes long-term holder value, causing ATOM to underperform deflationary assets (like ETH) in bull markets.

2. Lack of Strong Demand Supporting ATOM Value
   ATOM is predominantly used for staking and governance, while its practical applications remain limited due to the ongoing development of Inter-Chain Security (ICS) and DeFi ecosystem.

3. Dynamic Adjustment Mechanism May Fail
   If market confidence is low, inflation incentives may be ineffective, leading to continued inflation with low staking ratio.

Although Cosmos’s dynamic inflation mechanism effectively maintains network security, its high inflation rate hinders long-term value growth. Future plans focus on boosting ATOM demand through Inter-Chain Security, implementing more sophisticated economic models, and fine-tuning inflation incentives.

Source: atomscan.com

Market Response

The proposal could significantly impact SOL’s price. Solana’s strong performance in 2024—with transaction volume exceeding Ethereum and substantial TVL growth—provides a solid foundation for this proposal.

Supporters argue that the dynamic issuance model will reduce unnecessary inflation, particularly since current network activity and transaction fees can maintain network security. With Solana’s staking rate at 64.9% as of February 10, 2025, implementing the proposal could lead to decreased inflation rates, reducing dilution for non-staked SOL holders. This lower inflation could strengthen market confidence in SOL while easing selling pressure.

Source: solanacompass.com

In Q4 2024, SOL stakers earned around 2.1 million SOL ($430 million) through MEV (Maximum Extractable Value), showing robust network economic activity. This suggests that high inflation is no longer necessary to incentivize staking, making a dynamic model more suitable for Solana’s current stage of maturity.

Source: github.com

For example, Messari analyst Patryk supports the proposal, pointing out that SOL’s annual inflation rate hit 11.75% on January 17, 2025. This rate far exceeds the Minimum Necessary Amount (MNA) needed to maintain network security, effectively imposing a “hidden tax” on non-staked holders.

SIMD-0228 adjustment will not harm validators and network health while helping to reduce selling pressure, improve long-term returns for SOL holders, and drive Solana toward a more sustainable development model.

Source: x

Opponents argue that reducing inflation would lower staking yields, weakening validators’ economic incentives. With SOL’s staking yield historically above 7%, a decrease in issuance would reduce these yields. This could result in fewer validators participating in the network, compromising network security. Additionally, lower staking returns might push capital toward other networks offering higher yields.

Furthermore, relying on MEV revenue to compensate for reduced inflation might introduce centralization risks, as a small number of high-performance validators often captures MEV opportunities. The Solana community is clearly divided on this issue, with some concerned that the proposal may prioritize holders’ interests at the expense of validators’ long-term participation willingness.

Will SOL Become a Deflationary Asset?

The community has discussed options for deflation and reducing inflation. The current proposal is to fundamentally change the validator payment structure, implementing a zero inflation rate, where validators would only receive rewards from transaction fees

Solana’s base transaction fees are very low, although JitoSOL earns additional income through bribes. If priority fees and bribes flow to validators without new SOL issuance, the network will achieve 0% inflation. Furthermore, some proposals suggest burning 10% of fees, which would immediately make Solana deflationary. At current prices, deflation could lead to an increase in SOL’s market cap.

Meanwhile, validators will still earn rewards from the deflationary token, which will increase SOL’s scarcity over time. If SOL receives stable funding support, Solana will further solidify its leadership position in decentralized projects and has the potential to surpass Ethereum.

Price Expectations

If the new proposal reduces SOL issuance or lowers staking yields, it may reduce new supply in the market, easing selling pressure and supporting prices. For example, lower staking rewards might lead some holders to reduce selling, similar to how the EIP-1559 mechanism may enhance deflationary expectations.

However, SOL’s price is not only affected by supply-side factors but also depends on ecosystem growth, demand increase, and overall market conditions. If the new inflation mechanism fails to boost Solana ecosystem activity, price appreciation potential may be limited by just reducing supply. Overall, the proposal may have a long-term positive impact on price if it can enhance SOL’s scarcity while promoting ecosystem development.

Source: gate.io/trade/SOL_USDT

Impact on DeFi Ecosystem

1. Changes in Liquidity Supply
   Reduced issuance may lower SOL supply on DeFi platforms, leading to liquidity contraction.
   If staking yields decrease, some SOL might move from staking to DeFi, increasing liquidity.

2. Lending Market Adjustments
   Reduced supply may drive up SOL lending rates, increasing DeFi borrowing costs.
   Lower staking yields may encourage more users to participate in lending markets for higher returns.

3. Staking vs. DeFi Opportunity Cost
   Decreased staking rewards may drive capital toward DeFi, increasing TVL.
   If DeFi ecosystem yields cannot compensate for the reduced inflation opportunity cost, capital may flow out of the SOL ecosystem.
   DeFi ecosystem response depends on staking yields, DeFi yields, and overall market sentiment. If the new mechanism increases SOL scarcity, it may drive up prices. Still, it could also affect DeFi liquidity and borrowing costs, with specific impacts depending on how capital reallocates between staking and DeFi.

Source: solana.com

Impact and Forecast on Solana’s Future Development

This proposal opens up new paths for Solana network’s future development. Optimizing the fixed inflation mechanism enhances network adaptability, allowing Solana to maintain competitiveness in an ever-changing market environment. The market-oriented issuance adjustment mechanism builds a more resilient economic model and lays the foundation for long-term network expansion and technical upgrades.

Key Impacts

Reduced centralization risk: Decrease inflation to prevent long-term holders from losing influence due to dilution effects.

Enhanced SOL value in DeFi ecosystem: Lower “risk-free yield” threshold to attract more capital into DeFi protocols.

Mitigated market selling pressure: Reduce selling pressure caused by high inflation, improving SOL price stability.

Increased market transparency: Introduce market-driven issuance mechanism to align SOL supply with economic principles.

Furthermore, this mechanism ensures the staking rate remains above critical security thresholds (minimum 33%, target 50%), thus reducing potential risks like long-range attacks. Multicoin Capital emphasizes the importance of market mechanisms in optimizing economic models. By allowing SOL issuance to adjust dynamically with market conditions, the network will have greater flexibility to respond to different economic cycles while further enhancing security and decentralization.

Although the adjustment may lead to some decrease in SOL staking rate, according to current market data, this mechanism is expected to maintain a staking rate above 30%, posing no substantial threat to network security.

Source: github.com

Potential Risks

While the proposal aims to optimize Solana’s inflation mechanism and improve network security and decentralization, several potential risks exist:

1. Staking Rate Fluctuation Impact on Network Security

The proposal’s core logic is to adjust SOL issuance to guide the staking rate toward 50%.

If market response to this mechanism falls short of expectations, the staking rate might experience significant fluctuations, potentially dropping below the 33% minimum security threshold, increasing the risk of long-range attacks.

Decreased staking rates could reduce consensus security and affect validator network stability.

2. Economic Incentive Imbalance

If inflation decreases too rapidly, SOL staking rewards might become insufficient, reducing incentives for validators and delegators, weakening participation willingness.

Since the DeFi ecosystem still relies on SOL as a primary collateral asset, excessive inflation reduction might decrease SOL supply, affecting DeFi ecosystem liquidity and lending market capital efficiency.

3. Uncertain Short-term Market Response

With reduced inflation, decreased new SOL issuance might help price stability in the short term, but could also weaken some investors’ interest in high-yield staking, potentially triggering short-term market volatility.

If market expectations suggest that inflation adjustment cannot effectively enhance SOL value, negative market sentiment might emerge, potentially increasing selling pressure.

4. External Factor Impacts

SOL staking rate is influenced not only by network mechanisms but also by macroeconomic conditions, market liquidity, and competition from other L1 chains.

If other public chains offer more attractive staking rewards (such as Ethereum, Aptos, Sui), Solana might experience a staker exodus, which could affect network security.

5. Regulatory Compliance Issues

In some jurisdictions, staking rewards might be considered taxable income, and reduced inflation could cause holders to adjust investment strategies due to decreased returns, affecting network staking rates.

If certain countries implement regulatory adjustments to staking economic models, this could further impact staker behavior.

Source: gordonlaw.com

6. MEV and Network Fee Impacts

The current proposal doesn’t consider MEV (Maximum Extractable Value) earnings as supplementary validator incentives, which could affect future validator revenue models.

With reduced SOL issuance, the network might need to rely on higher transaction fees to maintain validator incentives, but if on-chain activity doesn’t significantly increase, this could lead to insufficient overall returns, affecting validator sustainability.

Source: solana.blockworksresearch.com

Conclusion

This proposal introduces a market-driven adjustment mechanism that dynamically regulates SOL issuance. This enhances the adaptability of Solana’s economic system and improves SOL’s utility efficiency while mitigating inflation’s negative impacts and ensuring network security. If successfully implemented, this mechanism will strengthen the long-term stability and sustainability of the Solana ecosystem.

However, any mechanism reform comes with challenges and risks. The implementation of SIMD-0228 requires broad support from the Solana community and validators, while ensuring fairness and transparency in the implementation process to prevent potential manipulation or improper benefit transfer issues.

While this proposal helps optimize SOL’s tokenomic model, enhance network security, and reduce market selling pressure, it faces potential challenges around staking rate fluctuations, market adaptation, and regulatory compliance. The Solana ecosystem’s long-term stability will ultimately depend on market acceptance of this mechanism and validators’ ability to maintain sustainable earnings.