The proposed SIMD-228, which aims to reduce SOL inflation by a significant 80%, has reportedly achieved support from 35.7% of Solana validators as it stands. Data from Dune Analytics shows that out of the 1327 active Solana validators, 701 have cast their vote, with 1.2% abstaining, 17.2% opposing the proposal, and 37.5% showing their support.
The implications of the approval of SIMD-228 are quite profound; such approval would lead to a dramatic decrease in staking rewards, thus reducing the number of new SOL tokens entering circulation. While this could potentially alleviate selling pressure, there have been concerns raised about the potential negative impact on the network’s decentralization.
Currently, Solana’s inflation model is based on a delicate equilibrium between the burning of transaction fees and staking rewards. In times of high network traffic, more fees are burnt, which helps counter inflation. However, as transaction costs have reduced, fewer tokens are being removed from circulation. The ongoing staking incentives continue to add fresh SOL supply at an inflation rate of 6.8%, a situation that could potentially depress its price.
Under the provisions of SIMD-228, staking rewards would decline, thereby lowering supply and potentially boosting the value of SOL. However, this could adversely affect smaller validators with low or no commission rates, pushing them into unprofitability and potentially forcing them out of the network. This could potentially undermine the decentralization of the network, raising questions about its long-term sustainability.
Prior to settling on SIMD-228, Solana developers weighed multiple options, some of which incorporated fixed-rate adjustments. However, Solana’s market performance has been less than stellar in recent weeks. As of March 13, SOL was trading at $126, a steep fall from its January peak of $293. As per DefiLlama data, decentralized finance activity has also taken a hit, as reflected by the drop in the network’s total value locked from $12 billion in January to a mere $7 billion.
With memecoin trading slowing down leading to lower network usage, monthly fees have also undergone a marked reduction, plummeting from $250 million in January to just $89 million in February. While the approval of SIMD-228 may lower supply pressure, its success is contingent on the expansion of network demand. Simply reducing inflation may not be sufficient to drive a robust recovery in the absence of an increase in users and activity.
