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.