Inflation exists primarily to bootstrap network security in Proof-of-Stake systems. However, Solana’s original inflation parameters were set arbitrarily high at a time when the network required substantial incentives to attract stakers. Today, given Solana’s significant growth and robust economic activity, these incentives have become excessive and are no longer economically optimal.
Current inflation imposes an unnecessary cost on SOL holders and creates selling pressure because rewards often must be liquidated to cover tax obligations. This persistent inflation acts as a leaky bucket, unnecessarily diluting SOL’s economic value.
SIMD-0228 introduces a new emission schedule that dynamically adjusts SOL issuance based on staking participation rates. Specifically, this proposal suggests:
• Increasing inflation modestly if staking participation drops below 33%, thereby safeguarding the network in the worst-case scenario.
• Reducing inflation below the current rate when staking exceeds 33%, aligning rewards more closely with the actual economic needs and security requirements of the network.
At approximately a 42% staking participation rate, staking returns would remain exactly as they are today, but inflation would fall significantly to just 2.7%. This change clearly benefits Solana by drastically reducing unnecessary dilution of SOL’s economic value.
Regarding concerns that lower inflation could negatively impact smaller validators by reducing their profitability, it’s important to clarify that validator profitability and sustainability are better addressed through targeted solutions such as reducing vote transaction costs and other efficiency measures. Inflation primarily serves as an incentive for stakers rather than as a direct subsidy for validators. Thus, inflation adjustments should be considered separately from validator profitability.
In summary:
• Strengthening security through automatically increasing staking incentives during periods of lower participation.
• Reducing overall inflation, allowing SOL’s market dynamics to become healthier, more attractive to long-term investors, and less distorted by artificial selling pressure.
• Validator sustainability should be addressed through more effective, targeted mechanisms instead of unnecessary high inflation.