Proposal For Introducing a Programmatic, Market-Based Emission Mechanism Based on Staking Participation Rate

[kankanivishal]

Authors: Tushar Jain, Vishal Kankani, Max Resnick

Background

As Solana matures, stakers increasingly earn SOL through mechanisms like MEV. This income stream reduces the network’s historical exclusive reliance on token emissions to attract stake and security. According to Blockworks (https://solana.blockworksresearch.com/), in Q4 2024 MEV, as measured by Jito Tips, was approximately $430M (2.1M SOL),representing massive quarter-over-quarter growth. In Q3 Jito Tips were approximately $86M (562k SOL), Q2 was approximately $117M (747k SOL), and Q1 was approximately $42M (300k SOL).

Given the level of economic activity the network has achieved and the subsequent revenue earned by stakers from MEV, now is a good time to revisit the network’s emission mechanism and evolve it from a fixed-schedule mechanism to a programmatic, market-driven mechanism.

The purpose of token emissions in Proof of Stake (PoS) networks is to attract stakers and validators to secure the network. Therefore, the most efficient amount of token issuance is the lowest rate possible necessary to secure the network.

Solana’s current emission mechanism is a fixed, time-based formula that was activated on epoch 150, a year after genesis on February 10, 2021. The mechanism is not aware of network activity, nor does it incorporate that to determine the emission rate. Simply put, it’s “dumb emissions.” Given Solana’s thriving economic activity, it makes sense to evolve the network’s monetary policy with “smart emissions.”

There are two major implications of Smart Emissions:

1. Smart Emissions dynamically incentivizes participation when stake drops to secure the network.
2. Smart Emissions minimize SOL issuance to the Minimum Necessary Amount (MNA) to secure the network.

This is good for the Solana network and network stakers for four reasons:

1. High inflation can lead to more centralized ownership. To illustrate the point, imagine a network with an exceedingly high inflation rate of 10,000%. People who do not stake are diluted and lose ~99% of their network ownership every year to stakers. The higher the inflation rate, the more network ownership is concentrated in stakers’ hands after compounding for years.

2. Reducing inflation spurs SOL usage in DeFi, which is ultimately good for the applications and stimulates new protocol development. Additionally, a high staking rate can be viewed as unhealthy for new DeFi protocols, since it means the implied hurdle rate is the inflation cost. Lowering the “risk free” inflation rate creates stimulative conditions and allows new protocols to grow.

3. If Smart Emissions function as designed, they will systematically reduce selling pressure as long as staking participation remains adequate. The inevitable side effect and primary downside to high token inflation is increased selling pressure. This is because some stakers in different jurisdictions have taken the interpretation that staking creates ordinary income, and therefore they must sell a portion of their staking rewards to pay taxes. This selling is a significant detriment to the network and does not benefit the network in any way. At today’s approximate 4.5% annualized inflation, at a $120 billion fully diluted valuation, new emissions amount to ~USD 5.5 billion per year.

4. In markets, sometimes perception is as important as reality. While SOL inflation is technically not cost to the network, others think it is, and that belief overall has a negative impact on the network. Inflation causes long-term, continual downward price pressure that negatively distorts the market’s price signal and hinders fair price comparison. To use an analogy from traditional financial markets, PoS inflation is equivalent to a publicly listed company doing a small share split every two days.

Historically, issuance curves have remained static due to Bitcoin’s immutability ethos—a “Bitcoin Hangover” so to speak. While immutability suits Bitcoin’s mission to become digital gold, it doesn’t map to Solana’s mission to synchronize the world’s state at light speed.

In summary, the current Solana emissions schedule is suboptimal given the current level of activity and fees on the network because it emits more SOL than is necessary to secure the network. An issuance curve set by diktat is not the right long-term approach for Solana. Markets are the best mechanism in the world to determine prices, and therefore, they should be used to determine Solana’s emissions.

For the sake of clarity, this proposal for SIMD-0228 is independent of other SIMDs under discussion currently. It can be executed standalone.

Testing

Based on our discussions with Anza and with core engineers the community call, there is an understanding that this is a straightforward technical update and poses no technical risks. Upon approval of the proposal, we will collaborate with Anza, the Solana Foundation, and the Jump/Firedancer teams on implementation.

Proposal

We propose updating the emissions rate formula to more accurately capture the market dynamics.

List of variables:

1. Fraction of total supply staked: (s)
2. Issuance Rate (i)
3. Validator returns: v(s) = i/s + MEV
4. r is the current emissions curve that automatically goes down every epoch at an annualized rate of 15% every year until it reaches 1.5% where it stops changing.

The suggested new formula and curve is:

When s > .5 the curve corresponds to just the first term: r(1 - sqrt(s)). This was the curve in the previous version of the SIMD. Based on community feedback, we have added the cmax(1-sqrt(2s),0) term to make the curve more aggressive when a smaller fraction of the network is staked. c is chosen such that the curve starts becoming more aggressive at s =.5, when half of the supply is staked, and surpasses the current static emission schedule of r when s = 1/3.

The derivation of c is provided in the appendix.

This yields a vote reward rate for validators with good performance of:

To ensure that the transition from the old static issuance schedule to this new schedule is smooth, we will interpolate between the old issuance rate and the new issuance rate over 10 epochs using the formula:

where is a parameter that controls the speed of the transition, taking the values 1/10, 2/10, …, 9/10, 1, over the first 10 epochs before settling to the new issuance rate at = 1.

Alternatives Considered

We considered a few alternatives and decided to settle upon the above curve.

Alternative Design 1: Pick another fixed curve. We rejected it because replacing one arbitrary curve with another arbitrary curve makes little sense.

Alternative Design 2: Fix Target Staking Yield inclusive of emissions and MEV payments. We rejected this approach because it incentivizes MEV payments to move out of sight of the tracking mechanism, thereby rendering the design completely ineffective, and impossible to implement.

Alternative Design 3: A controller function that increases or decreases inflation proportional to the magnitude of the difference between the actual staking participation rate and the target rate (for example, 50%). While this approach would have allowed for a more dynamic response to fluctuations in staking participation, it risks putting emissions back to current highs even if staking participation rate organically went below the target rate (for example, 50%)

Alternative Design 4: We considered only the first term of the proposed formula above. But that left the specific edge case of existing emissions curve unaddressed. That edge case was if at a future date staking rate continues to drop, and the terminal inflation hits 1.5%, then how would the network be secure. Hence, we added the second term to let the inflation increase beyond what is implied by the current curve in such an edge case scenario.

After considering all these options, we believe the proposed static curve is the most appropriate solution to address our inflation concerns as it is market-based, programmatic, and a function of a market variable.

Changes in the spirit of this proposal

Should any changes be necessary to ensure a safe and functioning implementation, such changes will be permitted without further governance requirements so long as the spirit of the proposal is maintained.

Voting Process

The voting process will proceed as follows:

Discussion period: Validators are encouraged to participate in discussions to address any concerns.

Stake weight collection period: Stake weights will be captured and published for voting. Validators will have the opportunity to verify these weights.

Vote token distribution will require validators to utilize the adapted Jito Merkle Distributor tool (available at GitHub - laine-sa/solgov-distributor: A merkle-based token distributor for the Solana network that allows distributing a combination of unlocked and linearly unlocked tokens.) to claim the vote tokens corresponding to their stake weights.

Three token destination accounts will be created for voting choices: Yes, No, and Abstain.

Validators will have a designated period to vote by sending their tokens to the respective addresses.

After the voting period, if the sum of Yes votes is equal to or greater than 2/3 of the total sum of Yes + No votes, the proposal will pass.

The proposal has a quorum threshold of 33%, abstentions count towards the quorum.

All announcements regarding this process will be made in the Governance category of the Solana Developer Forums.

Stake weights and a tally script will be available at solgov-distributor/votes at master · laine-sa/solgov-distributor · GitHub

Timeline

Epoch 747 - 751: Discussion period

Epoch 752: Stake weights captured and published, discussion/confirmation of stake weights

Epochs 753 - 755: Voting tokens available to claim, voting completes at the end of epoch 755

Discussion

Active participation in discussions about this proposal is crucial. Discussions may also take place on the Solana Developer Forums or on Discord Governance channel. It’s encouraged to consolidate discussions to ensure broad participation and minimize redundancy.

References

SIMD-0228: solana-improvement-documents/proposals/0228-market-based-emission-mechanism.md at patch-1 · tjain-mcc/solana-improvement-documents · GitHub

[Leapfrog]

This proposal will likely have disastrous effects on the confidence of Solana when needed most.

If inflation were to increase when investment confidence is low ie investors were destaking and selling this will magnify the panic. A volatile asset is no place for long term large investors no matter how great the staking reward … if anything the fundamental idea here should be exactly opposite of what has been proposed.

As a believer in the future of solana I’d try encourage stability of the asset price and steady market cap growth over staking rewards. There already are additional incentives to staking in solana like the transactional activity (Jito) rewards, so no need to add selling pressure and flight risk by escalating inflation in the moment stability and confidence are required most…

[IceFrosTv2]

The more coins in staking, the more stable and higher the token price and the lower the inflation, and therefore the lower the APY that delegates receive.
At the same time, this does not affect competition among validators, giving an advantage to some over others, as the APY will be about the same for all.
As for doubts about capitalization and token price at critical moments, I don’t see a problem with that. Those investors who want to sell their coins in a moment of panic will do so regardless of the inflation rate at the time. But it may stop many other people from selling their coins in favor of staking. After all, if a person believes in the future of blockchain and thinks it will be a success, they are more likely to choose to make money from staking than to sell in the hope that they might be able to buy cheaper.

[Leapfrog]

Your assumption is that when inflation goes up people stake more. I would argue that when the inflation goes up as there is a lot of destaking - those who have yet to stake would rather just sell…

[IceFrosTv2]

To each their own. I’m just speaking from my point of view. If I see 5% APY, I’m more likely to sell to avoid locking up funds. If I see 10-20% APY, I’m more likely to put it in staking, given that I can release the funds and sell within two or three days.
Besides, there’s nothing stopping me from opening a hedge position. For example, even with an APY of 20%, I can throw coins into staking and open a short with the first leverage. This way I don’t care about the price fluctuations in the market, but I also take my percentage from farming

[Leapfrog]

So I think the main point that we are missing is that as the system currently stands - if 300M sol staked went down to 150M sol staked (ie half) Then the inflation reward (say 5%) would suddenly be distributed to half the stake and so double the staking APY… so as it stands the reward already goes up with less stake.

The second point is that inflation rewards are often miss interpreted as earnings where as what is actually happening is a devaluing of the currency. So taking your scenario where you see 5% APY lets call it 5% inflation then you see 20%APY ie 10% inflation (as the rest is due to the inflation being distributed to less stake as pointed out above)… all that means is that every sol is decreasing in value by 10% per annum rather than 5% per annum (assuming stable market cap). So your new rewards are actually just there to keep what you had previously. The rest of the sol holders are losing money twice as fast.

[bullmoosesystems]

I’ve been back and forth here, but ultimately I’m against this, mostly because I don’t think there’s a big impact, and the uncertainty created from changing the monetary policy to something that is floating is damaging for institutional investor confidence.

Additionally, it feels somewhat arbitrary here. Why is 50% stake the “pivot point”? Why not 66% or 75%? The issuance/inflation rate itself doesn’t impact price at all, it’s the 2nd order effect of stakers selling those inflation rewards. On the other hand, higher inflation rates might encourage buyers to step into the market.

Regarding the tax question, those users (in many jurisdictions) can simply hold an LST to avoid the tax issue. I don’t think we should be optimizing for something that is a moving target and very different globally.

The market already naturally addresses the aim of Smart Emissions today:

1. When activity is low during bear markets, stake % naturally increases. Go look at nearly every major PoS asset during any bear market and you’ll see that. When the bull market arrives, stake % naturally declines because there are more opportunities to do things with your SOL, so the “risk free” inflation rate from staking isn’t as attractive any more.
2. We have no clue what the “Minimum Necessary Amount” of stake is to secure the network. This proposal targets 50%, but that feels very arbitrary.

Ultimately, I think there’s significant value in having stable monetary policy. Once we change monetary policy once, it becomes more likely that we will change it again. Institutional investors do not like the uncertainty. Worse yet, if we change monetary policy to a floating target (albeit algo determined), then it becomes even more difficult for institutional investors to model returns and thus build valuation models. That uncertainty leads to increased discount rates and lower valuations in these valuation models.

Although the initial, fixed monetary policy may not be “perfect”, there isn’t really a perfect monetary policy out there and there’s a real cost to the change. If we change from one thing that isn’t “perfect” to another thing that isn’t “perfect”, but incur the change cost, is it really worth it?

[kankanivishal]

@bullmoosesystems

nge monetary policy to a floating target (albeit algo determined), then it becomes even more difficult for institutional investors to model returns and thus build valuation models. That uncertainty leads to increased discount rates and lower valuations in these valuation models.

Although the initial, fixed monetary policy may not be “perfect”, there isn’t really a perfect monetary policy out there and there’s a real cost to the change. If we change from one thing that isn’t “perfect” to another thing that isn’t “perfect”, but incur the change c

Hi @bullmoosesystems Thanks for your response. We have updated the emissions formula to a static curve. It does not target 50% staking rate anymore. The updated formula was arrived after consulting many validators and community members in the space. It is updated in SIMD and also is above. Please let us know your thoughts on the new formula.

[0x_zak]

As a Staker, I am completely for this,
But I also understand that my faith is in the validators approving or rejecting this very important proposal. Given that the validators voted for SIMD 96, I hope this comes to pass as well, or I def. would start to get concerned about the optics and incentive alignment between stakers and validators, and yes I know I can just delegate to another validator who is in favour.
but just a general sentiment.

It is very important to not overpay for security, I really hope every validator thinks about that and the overall health of our blockchain.

Thanks

[kankanivishal]

Main objective of this proposal is to reduce unnecessary emissions, not increase. So long as the staking rate is above 33%, SIMD-0228 proposed emissions are lower than today’s curve. At current staking participation rate of ~65%, they are ~80% lower. This increases investor confidence.

Only when staking rate starts dropping below 33% for whatever reasons, we have introduced the failsafe of incentivizing stakers. This feedback was directly sourced from community of validators looking out for network risks.

[Leapfrog]

When staking drops below 33% the incentive is already there for the rewards naturally increase as I’ve pointed out above. No need to increase inflation at this point… or any point for that matter.

[kankanivishal]

it is not for just today. say 5-6 years out, if Solana inflation is at 1.5% and stake is at 33%, and activity is mild - in that edge case, it is a boost to stakers/validators to stay onboard.

[Xen]

Those unnecessary emissions are not that unnecessary for validators, as they must pay vote fees in SOL regardless of the network’s total stake. New or smaller validators that need to take a commission to supplement their vote fees are greatly affected.

I think this will be disastrous for smaller validators and will raise the barrier to entry to a point where it excludes potential new entrants based on stricter criteria, reducing innovation and decentralization. The barrier to entry is already high, and the validator count is already low (in my opinion, of course). We could argue all day about decentralization, but I don’t think the current curve is bad or arbitrary it’s the curve Solana is succeeding on and the one the market has accepted.

You do not lose to inflation if you stake. And now, there are LSTs that remove the downsides of native staking, which, let’s be honest, are very few. Epochs are getting shorter and shorter as the network becomes faster. I am no math or market expert but I think this has negative effects on the validator ecosystem.

[businessmngr]

SIMD-0228’s dynamic emission model could unintentionally push small validators out of the network by raising the break-even threshold. With only Foundation delegation and stake pools delegation, and limited liquidity from the general public, many small validators may struggle to remain profitable as rewards decrease when staking participation exceeds the target. Unlike larger validators, small ones also lack significant independent delegations, making it even harder to attract stake and sustain operations. This will likely lead to further stake centralization, as larger validators can absorb reward reductions more easily, while smaller ones will be forced to shut down.

The primary goal of SIMD-0228 is to decrease inflation and adjust the amount of SOL staked to market equilibrium. With SIMD-0123 (sharing block rewards at protocol level), validators will race to zero by competing for the best APY, potentially directing almost all block rewards to stakers. This will concentrate liquidity around those offering the highest APY, making it difficult for smaller validators to cover costs and remain competitive, similar to the current challenge of LSTs competing with JupSOL in terms of APY. We likely won’t see a significant reduction in staking, as the race to zero rewards will keep APY high.

Also, I think LSTs will lose their edge over pure staking somehow. Right now, only LSTs can distribute premium yield by sharing back block rewards. If this is equalised, the APY will be the same as native staking, and most people will choose native staking since it is more secure and avoids the additional layer of LST risk.

[123test]

Will this result in fewer Validators? Probably yes.

[solanacompass]

One thing I feel problematic about the inflation proposal is this:

Stakers delegate to us to act in their interests. This means ‘securing the network’ (presumably this includes voting for things that may make it better) but also ‘earning us yield’.

It’s not really clear how much they are influenced by one concern over the other, but you could argue the high staking rate (~70% of SOL) and low defi usage (~11% of stake is liquid) implies they like the status quo and are not that interested in defi

Depending on where a validator stands on this SIMD, they may or may not feel it is a vote to improve the network for all users. But a vote in favor is still actively voting to decrease their own staker’s yield. If this is a staker’s main motivation in staking, a validator is voting against their stakers’ own interests.

[c2yptic]

yes. mid-small level validators ( in terms of stake ) will have extreme difficulties operating if this change comes in to place and will likely close shop

[diman]

a copypasta from SIMD-0228: Market-Based Emission Mechanism by tjain-mcc · Pull Request #228 · solana-foundation/solana-improvement-documents · GitHub

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Motivation is very weak. There are questions about many statements.

I see other issues that concern me more, such as the percentage inflation rate.

You start the motivation by mentioning MEV payouts, which are not part of the protocol at all. Validators themselves are customers/clients in this case, meaning they depend on a commercial project rather than the protocol, or they can act independently (i.e., validators extract MEV themselves, and it is distributed to stakers without intermediaries), or there is real competition among MEV proxy providers in the market. For me, the way MEV currently works on Solana is already a huge problem. So making protocol changes based on the MEV issue seems like the wrong move to me. The MEV issue needs to be solved first.

And so on. Brian mentioned several points above and did not receive answers to them. I won’t repeat.

Also, for example, I see a completely opposite conclusion from the four points in the proposal.

To me, it is obvious that reducing the APY of native staking will lead to an outflow of small stakers from native staking. This means that the share of large stakers in active staking will increase. And active native staking controls the PoS network. So the network control by large stakers will grow.

Technically, finding the balance point involves delegating and undelegating. But the problem is that fees in liquid pools and skipping one epoch in native staking make this process less active. Due to restaking (not to be confused with the currently popular marketing term), up to a month of rewards can be lost. All of this combined will cause small stakes to shift under the control of liquid pools with additional yield.

So, I see why this is bad for the Solana network.

My conclusion: perhaps this proposal is ahead of its time.

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[bullmoosesystems]

Ah I see now. Thank you.

Regardless, that was only a minor point. I’m mostly not in favor because I don’t like the idea of drastically changing the monetary policy for an unclear set of tradeoffs/advantages/disadvantages and changing it to something that itself is constantly changing. I don’t feel like we have a major issue or imminent threat to address and there are likely to be unforeseen negative consequences to changing the policy.

[MaxSherwoodH2O]

Firstly I want to thank the authors for this well-constructed proposal.

However, I disagree with this proposal.

While it’s true that many validators are arguably earning “too much” at the moment, it’s also true that many of us operated at break-even or at a loss during the years of 2022 and 2023. Block rewards and MEV were non-existent, and we depended on commission on voting rewards to survive. When the bull market started, many of us moved to a 0% voting commission fee and a 0% MEV commission fee, earning just the block rewards. But block rewards vary extremely from epoch to epoch depending on volatility in the market day-to-day. MEV is the same. Once the bull market is over, I expect block rewards and MEV to significantly decrease, requiring many validators to raise commissions and once again depend on voting /inflation in order to stay profitable.

Solana is one of the few networks with a large, permissionless set of validators. However, the distribution of stake is very long-tail.

If you imagine that the break-even point (how much stake does a validator need to break even) depends on the current MEV, block rewards, and inflation / voting rewards, it’s not hard to image a scenerio where this proposal passes, reducing inflation by 80% as stated previously, then a bear market reduces MEV and block rewards by 80% or more, and suddenly we go from 1500+ profitable validators to 150. For me, one of Solana’s strengths is it’s decentralization, (despite what the nay-sayers would have you believe) and it would be hugely bearish for the validator set to reduce by 80% or more in the name of saving 3 or 4% per year in inflation.

Additionally, I also agree with the previous points that a “dumb” curve is actually much easier to understand and model, whereas a “smart” curve is more complicated and unpredictable.

I do understand the reasoning behind this proposal, but I think it would be exceptionally poor timing to pass this during the height of the bull market. I am fully supportive of revisiting this in a year’s time when we can see evidence of persistent MEV and block rewards over more than a few quarters.