Key Points | TL;DR

• Proposal Essence: SIMD-0228 significantly reduces Solana’s inflation rate (from 4.779% to 0.87%), decreasing token issuance while ensuring network security and unlocking capital for DeFi.
• Core Mechanism: The current inflation model follows a fixed reduction pattern (starting at 8% and decreasing by 15% annually, with a target of 1.5%), which has been criticized as “inefficient issuance.” The new model is market-driven: when the staking rate is high (>65%), inflation is low; when the staking rate is low (<33.3%), inflation is high, with 33.3% being the equilibrium point.
• Diverging Opinions: Large investors and non-stakers support it (less dilution, stable prices); small and mid-sized validators and stakers oppose it (reduced earnings); large validators support it (strong MEV benefits). It’s like a supermarket discount—big stores thrive, while small ones struggle.
• Impact on Validators: Staking rates may drop from 65.7% to 45–55%, leading to the exit of 3–4% of validators (40–55 in total). Validator revenue shifts from inflation rewards to MEV. SOL locked in DeFi is expected to increase by 5–10%. This is similar to factory layoffs—efficient workers stay, while inefficient ones leave.
• Ecosystem Impact: Currently, annual issuance is 382 million, with 25% (95.5 million) being lost. SIMD-0228 “plugs the leaky bucket,” reducing losses to 78.3 million per year, boosting DeFi growth, optimizing resource allocation, and reducing dilution.
• MEV & Inflation: Validator income shifts from “fixed salaries” to “tips” (MEV). In 2024, MEV is expected to reach 675 million, accounting for 14% of total issuance. While returns are higher, they are also more volatile.
• Security Risks: Low staking rates → higher inflation → price drops → validators exit, forming a negative cycle. Increasing reliance on MEV raises centralization risks. Under extreme conditions, network stability remains untested, much like an economic downturn—preventive measures exist but are not foolproof.
• Proposal Significance: SIMD-0228 is not just a technical change; it marks Solana’s shift from “overpaying for security” to “finding the minimum necessary payment.” It transitions from rule-based inflation to market-driven balance—similar to moving from a planned economy to a market economy. This could push Solana toward a more mature, market-oriented economic model.
• Recommended Actions: If the proposal passes, token holders should adjust staking strategies, validators should optimize for MEV, and developers should seize new DeFi opportunities.

Key Term Explanations

Before diving into the analysis, let’s first understand some core concepts:

• Staking Rate (s): The percentage of SOL locked for network validation relative to total supply, currently around 65.7%.
• Inflation Rate (i): The percentage of new SOL issued annually relative to total supply, currently around 4.779%.
• Validators: Node operators in the Solana network responsible for validating transactions and maintaining network security.
• MEV (Maximal Extractable Value): The additional profit validators earn from transaction ordering, similar to “transaction tips.”
• Leaky Bucket Effect: A phenomenon where newly issued tokens (inflation-created value) leak out of the ecosystem through mechanisms such as taxation.

Beginner-Friendly Guide：This article provides a detailed analysis of how the SIMD-0228 proposal modifies Solana’s inflation mechanism. Even if you’re unfamiliar with blockchain and cryptocurrency concepts, look out for the “💡Beginner’s Explanation” sections, where I’ll break down complex topics into simple terms. Now, let’s dive into the main discussion. 👇🏻

0. Introduction: Five Key Questions to Understand Solana’s Inflation Policy Shift

Solana is at a historic turning point—the SIMD-0228 proposal could fundamentally change its inflation mechanism, shifting from a fixed schedule to a market-driven dynamic model. This is not just a technical adjustment but a profound restructuring of Solana’s economic framework.

The core question that SIMD-0228 seeks to answer is: How can unnecessary token issuance be minimized while maintaining network security?

With this key issue in mind, let’s explore the background. Below are five critical questions that will help explain why this proposal has sparked such widespread debate:

• What are the deeper strategic conflicts behind this proposal? How will the distribution of benefits be reshaped?
• How will the validator economy be impacted and restructured?
• Will a decline in staking rates threaten network security? Is there a critical threshold?
• How will the relationship between MEV and inflation change? What are the implications of shifting revenue sources?
• How is the “Leaky Bucket Effect” quietly eroding the Solana ecosystem? Are billions of dollars disappearing each year?
• Could low staking rates lead to systemic risks? Could a negative feedback loop threaten network stability?

💡 Beginner’s Explanation: Imagine Solana as a country that is considering changing the way it prints money. Right now, this country follows a fixed schedule to issue new currency every year. However, the new proposal suggests that the amount of new money printed should depend on how many people deposit their funds in banks (staking their SOL). If many people stake, less money is printed; if fewer people stake, more money is issued. This change will impact everyone—banks (validators), savers (stakers), consumers (DeFi users), and ordinary token holders.

1. Deep Dive Into SIMD-0228: Authors, Timing, Core Changes, and Stakeholder Interests

Proposal Authors: High-Profile Figures

The SIMD-0228 proposal was jointly submitted by three influential figures in the Solana ecosystem:

• Tushar Jain — Co-founder of Multicoin Capital, one of Solana’s earliest and largest institutional investors. Tushar has consistently expressed long-term confidence in Solana and frequently discusses blockchain monetary policy.
• Vishal Kankani — Investment Partner at Multicoin Capital, specializing in crypto-economics and market structure research. He has published multiple in-depth analyses on Solana’s ecosystem and value capture mechanisms.
• Max Resnick — Engineer at Anza, a core developer in the Solana ecosystem with extensive technical expertise and deep familiarity with Solana’s codebase. He contributed the technical implementation details of the proposal.

It is worth noting that two of the authors are from Multicoin Capital, a major venture capital firm and one of Solana’s largest institutional investors. Given that Multicoin Capital holds a substantial amount of SOL tokens, this background is crucial to understanding the potential interests behind the proposal.

💡 Beginner’s Explanation: The authors of this proposal are not just random community members—they are major players in the Solana ecosystem. Two of them are executives at a major investment fund that holds a lot of SOL, while the third is a core Solana engineer. Knowing who is driving these changes is important because it could influence how the proposal is designed.

Proposal Timing: January 2025

• Surging MEV Revenue — In Q4 2024, Solana’s MEV revenue reached a staggering $430 million, over 10 times the Q1 amount. This data strongly supports reducing inflation (Solana Floor) by proving that validators already have sufficient alternative revenue sources beyond inflationary rewards.
• High Staking Rate — The current staking rate stands at 65.7%, an all-time high, providing favorable conditions for reducing inflation without immediately destabilizing the network.
• Ecosystem Maturity — Solana’s DeFi ecosystem has matured enough to absorb and effectively utilize the capital that would be freed up from reduced staking rewards.
• Market Environment — In the broader crypto market, monetary policy and inflation control have become hot topics, making this a timely discussion.

Core Changes: Current Status vs. Proposal’s Ideal Outcome

The table below provides a detailed comparison between the current state of Solana’s network (as of January 18, 2025) and the expected outcomes if the SIMD-0228 proposal is implemented.

These figures clearly illustrate the core objectives of SIMD-0228:

• Significantly reduce the inflation rate
• Minimize unnecessary token issuance
• Maintain sufficient network security while unlocking more capital for the DeFi ecosystem

💡Beginner’s Explanation: The Solana inflation model comparison in the table shows how drastic this change is. In simple terms: Currently, Solana “prints” new tokens at a rate of 4.78% per year. The new proposal aims to cut this down to about 0.9%, an 82% reduction! This means validators (network maintainers) will see their base income drop sharply, but they can compensate for it through other revenue streams (such as MEV, which can be understood as “tips” earned from optimizing transaction order). However, this shift could also force 40–55 smaller validators to exit the network due to insufficient earnings.

Original Formula & Design Concept

The core of the SIMD-0228 proposal is the introduction of a staking rate-based dynamic inflation formula:

This formula may seem complex, but its design is highly sophisticated:

• Uses a square root function instead of a linear relationship, making inflation decrease more gradually at high staking rates and increase more aggressively at low staking rates.
• A critical threshold is set at 33.3%—when the staking rate reaches 33.3%, the inflation rate equals the current fixed rate.
• A coefficient (c ≈ π) is introduced to ensure smooth transitions across different staking rate ranges.

💡 Beginner’s Explanation: Don’t worry about the complex formula! The key takeaway is understanding its effect. The diagram below simplifies it:

• If a large percentage of SOL is staked (above 65%), the “money printing” rate significantly decreases.
• If staking participation drops (below 50%), inflation slightly increases.
• If the staking rate falls below 33.3%, inflation rises sharply to incentivize more staking.

Think of this like an automatic regulator that helps balance the network—when too few people stake, it encourages more staking, and when too many stake, it slows down inflation.

The formula in SIMD-0228 is designed to dynamically adjust the inflation rate based on different staking rate scenarios: high, medium, and low staking participation. This reflects the proposal’s core mechanism—using market forces to automatically regulate inflation, ensuring that inflation is just enough to maintain network security—no more, no less.

Proposal’s Interest Motivations

By carefully analyzing the proposal’s content, the background of its authors, and its timing, we can identify several key stakeholder interests:

• Reducing Token Dilution — Multicoin Capital holds a large amount of SOL; reducing inflation could cut annual dilution by 4.56%, preserving their holdings’ value.
• Supporting SOL’s Price — Reducing token supply could potentially push up SOL’s price (Cryptotimes).
• Unlocking Capital for DeFi — The proposal highlights how high staking rates suppress DeFi growth. By encouraging capital to flow into DeFi, projects that Multicoin Capital has invested in could benefit.
• Shaping a Market-Driven Narrative — The proposal repeatedly emphasizes that “the market is the best price discovery mechanism,” reinforcing Solana’s branding as a highly efficient network.
• Optimizing Validator Economics — Max Resnick focuses on long-term sustainability, reducing validators’ reliance on inflation-based rewards.

💡 Beginner’s Explanation: There are multiple motivations behind this proposal. Imagine you own 10% of a company’s shares. If the company issues 5% more shares every year to employees, but you don’t receive any, your ownership percentage will shrink over time. Large investors like Multicoin Capital want to reduce this dilution while also hoping for SOL’s price to increase (since reducing supply growth typically benefits price). Additionally, they want more SOL to flow into DeFi applications, as they have also invested in these projects. It is important to note, as shown in the diagram below, that while the proposal aligns with large investors’ interests, it also considers the broader ecosystem’s health. The security threshold in the formula, the 50-round smoothing transition period, and other design details indicate that the authors are trying to balance different stakeholder interests rather than exclusively favoring large holders.

Proposal Timing

The decision to introduce SIMD-0228 in January 2025 carries specific strategic significance:

• Surging MEV Revenue — In Q4 2024, MEV revenue skyrocketed to $430 million, more than 10 times the Q1 figure. This provides strong support for reducing inflation, as it proves that validators now have sufficient alternative income sources beyond inflation rewards.
• Historically High Staking Rate — The current staking rate of 65.7% is at an all-time high, creating favorable conditions for reducing inflation.
• Mature Ecosystem — The Solana DeFi ecosystem has grown significantly, making it capable of absorbing and utilizing the capital that will be freed from reduced staking rewards.
• Market Trends — Monetary policy and inflation control have become hot topics in the broader crypto market, aligning this proposal with macro-level discussions.

💡 Beginner’s Explanation: The timing of the proposal is carefully planned. Just like governments prefer to implement economic reforms during times of stability, the authors of this proposal chose a “perfect moment”:

• Validators are earning more money from transactions (MEV) than ever before.
• The current staking rate is very high (65.7%), making it easier to lower inflation without destabilizing the network.
• Solana’s ecosystem is now well-developed, meaning that the capital released from reduced staking rewards can be put to use in DeFi.

All these factors make this the ideal moment to slow down Solana’s “money printing” rate.

2. From Fixed Schedule to Market-Driven: More Staking, Less Printing

Currently, Solana follows a fixed-decline inflation model: starting at 8%, decreasing by 15% annually, and currently at approximately 4.78%, with a final target of 1.5%. This mechanism has been criticized by the proposal authors as “dumb emissions”, since it does not take the actual state of the network into account.

The new model proposed in SIMD-0228 introduces market-driven factors by dynamically linking inflation to the staking rate. Instead of following a fixed schedule, the new design lets the market determine inflation levels. When the staking rate is 33.3%, the inflation rate matches the current fixed-rate model, creating a critical equilibrium point.

Key Properties of This Formula:

• Higher staking participation leads to lower inflation.
• Lower staking participation leads to higher inflation.
• This self-adjusting mechanism ensures that inflation naturally adapts to maintain network security without excessive token issuance.

💡 Beginner’s Explanation: Right now, Solana’s “money printing” schedule is fixed—it decreases by 15% every year until it reaches 1.5%, no matter what happens in the economy. This is like a government printing money at a fixed rate, regardless of economic conditions. The new proposal works more like a modern central bank—it adjusts the money supply dynamically based on economic activity (staking rate). If the economy is strong (high staking rate), less money is printed; If the economy is weak (low staking rate), more money is printed to stimulate activity.

3. How Will Solana’s New Monetary Policy Reshape the Ecosystem?

3.1 Large Investors & Institutional Investors

• Core Interests: Reduce dilution, support SOL price, and optimize DeFi capital efficiency.
• Representative point of view: Tushar Jain & Vishal Kankani argue that lowering inflation stimulates DeFi growth (SIMD-0228 and Solana DeFi).
• Max Kaplan (Sol Strategies) supports the “better to be roughly right than precisely wrong” principle, emphasizing the flexibility of a market-driven system.
• Marius (Kamino Co-founder) states that staking encourages hoarding and reduces financial activity, advocating for lower inflation to enhance liquidity.
• Potential Motivations: Shape the “market-driven, high-efficiency network” narrative to attract more institutional investment. Many large investors likely have diverse investments across the Solana ecosystem and seek to optimize their overall portfolio value.
• Position: Supportive. Lower inflation reduces new token supply, protecting their holdings while increasing DeFi activity, making the ecosystem more attractive.

3.2 Validators

Large Professional Validators

• Core Interests: Maintain network influence and optimize MEV extraction to compensate for the reduced inflation rewards.
• Characteristics: Possess advanced MEV extraction technology; Hold significant voting power and play a major role in network governance; Highly adaptable to inflation changes.
• Examples: Exchange-operated validators such as Binance and Kraken; Institutional validators with an average inflation commission rate of 2.75%.
• Position: Supportive. Can offset lost inflation rewards through MEV and transaction fees, ensuring continued profitability.

Small & Medium-Sized Validators

• Core Interests: Maintain economic viability and manage voting costs (around 2 SOL per round).
• Concerns: Helius data suggests that 3–4% of validators may exit the network due to this proposal; Fear of a “zero-commission race,” which could worsen their financial sustainability; 49% of validators already charge 0% commission, making them highly sensitive to inflation changes.
• Examples: Validators like Chainflow, which rely on the Solana Foundation Delegation Program (SFDP).
• Position: Opposed. Many may exit the network (David Grider on X).

3.3 Developers & Ecosystem Builders

• Core Interests: Increased network activity, capital inflows into DeFi and the application layer, and preserving decentralization.
• Divided Opinions:

Supporters: Believe the proposal will unlock more capital for applications and DeFi.

• Max Resnick (Anza, co-author of the proposal) emphasizes the “Leaky Bucket Effect”, arguing that reducing inflation prevents capital outflows via unnecessary taxation (Solana’s SIMD-0228 Proposal Could Slash SOL Inflation to 0.87%).

Skeptics: Worry that validator exits could threaten decentralization.

• Leapfrog, in community discussions, expressed concerns about a potential inflation spiral (Six Questions and Answers: A Comprehensive Analysis of Solana’s Latest Proposal SIMD-0228 and Its Impact on the Industry).
• Example: Helius (a node infrastructure provider) provides neutral data analysis, focusing on network health rather than taking sides.
• Position: Mixed. Some see DeFi expansion opportunities, while others worry about decentralization risks.

3.4 Retail Token Holders

Active Stakers

• Core Interests: Stable staking returns, sensitivity to tax-like effects from inflation.
• Impact:

In high-staking scenarios, yields will slightly decrease but become more sustainable.

Example: Staking APY drops from 7.03% to 1.41%, requiring a reevaluation of staking strategies.

Stakers may migrate toward validators with stronger MEV capabilities to compensate for lower inflation rewards.

• Position: Opposed—lower staking returns reduce their investment yield.

Non-Stakers

• Core Interests: Less dilution, SOL price appreciation.
• Impact:

Direct beneficiaries of reduced inflation—as less new SOL is minted, their holdings retain more value.

The reduced “Leaky Bucket Effect” could help support SOL’s price over time.

• Position: Supportive—lower inflation protects their holdings’ value.

3.5 The Hidden Power Struggles

MEV Infrastructure Controllers

• Core Interests: As inflation rewards decrease, MEV extraction becomes increasingly important. Those who control MEV infrastructure gain more power over network revenue.
• Example: MEV optimization providers like Jito, and entities that control block construction algorithms.
• Position: Supportive—Lower inflation makes MEV a dominant revenue stream, increasing their influence in the market.

Governance Power Holders

• Core Interests: Influencing future protocol upgrades and maintaining control over the ecosystem’s direction.
• Potential Consequences:mIf validator centralization increases, governance power could become more concentrated. Closer ties may form between core developers and large capital-backed validators.
• Position: Supportive (if they represent large validators)—Fewer but stronger validators make it easier to control network decisions.

Community Controversy:

There is controversy within the community regarding SIMD-0228, particularly concerning its impact on small-scale validators. David Grider’s long thread indicates that under different scenarios, 50–250 validators might be lost, which could pose a decentralization risk to the network, raising concerns within the community. An unexpected detail is that the exit of small validators might trigger a “zero-commission race,” further worsening their financial situation, while large validators could strengthen their influence through MEV.

The latest article on the Helius blog also analyzes this issue: The validator economic model is being challenged.

Large Professional Validators: Potential Winners in a Survival-of-the-Fittest Environment

Large professional validators typically have the following advantages:

• Possess advanced MEV extraction technology, which can compensate for reduced inflationary rewards.
• Have sufficient capital and technical resources to adapt to the new environment.
• Hold greater influence in network governance.

For this group, SIMD-0228 may present an opportunity to gain a larger market share within the validator ecosystem. By optimizing MEV extraction and reducing operational costs, they can maintain or even enhance profitability.

Small and Medium Validators: Facing Survival Challenges

In contrast, small and medium validators face greater challenges:

• Often lack efficient MEV extraction capabilities.
• More sensitive to voting costs (about 2 SOL per round).
• Disadvantaged in the “zero-commission race.”

Small validators such as Chainflow have already expressed concerns, stating that “despite doing everything possible to attract stakes, they remain heavily reliant on SFDP delegation to continue operations.”

Validator Economic Model Data:

• Among 1,316 validators, 647 (49%) have a commission rate of zero on staking rewards, meaning inflationary changes have a limited impact on them.
• In a high staking rate scenario (70%), approximately 3.4% of validators are expected to exit due to unprofitability.
• David Grider’s model suggests that under different scenarios, 50–250 validators might exit.

Summary

In summary, the interest game surrounding the SIMD-0228 proposal reflects the complexity of the ecosystem. Large investors and institutions support it, while the validator community is divided—large validators are in favor, whereas small validators oppose it. The stance of developers and ecosystem builders is more complicated. Among ordinary token holders, opinions are also split—stakers oppose it, while non-stakers support it. Within the hidden power dynamics, MEV controllers and governance influencers are likely in favor of the proposal.

💡 Beginner’s Explanation: This is similar to changes in the retail industry: large chain stores (large validators) have the resources to invest in advanced technology and can survive profit reductions through efficiency and scale advantages. On the other hand, small independent stores (small validators) face greater pressure and may be forced to close or be acquired. SIMD-0228 could result in around 40–55 small validators exiting the network because they cannot remain profitable in the new environment.

4. The Impact of SIMD-0228 on the Validator Landscape

SIMD-0228 could have vastly different effects on different types of validators. According to Helius’ validator economic model:

• Out of 1,316 validators, 647 (49%) have a zero commission rate on staking rewards, meaning inflationary changes have a limited impact on them.
• In a high staking rate scenario (70%), about 3.4% of validators may exit due to unprofitability.
• According to David Grider’s model, 50–250 validators could exit under different scenarios.

These changes will not only affect the economic viability of individual validators but may also reshape the entire validator ecosystem’s structure and competitive landscape. The key question is: Are we willing to accept a reduced number of validators in exchange for a more efficient economic model?

💡 Beginner’s Explanation: “The Validator Survival Game”
Imagine the Solana network as a large factory, and validators as its quality inspectors. Now, the factory management (network governance) is adjusting the reward system:

Before: Every inspector received a fixed salary.

Now: Only the most efficient inspectors get higher rewards.

The result?

• Some less efficient inspectors may be eliminated.
• The quality inspection process may become more refined.
• But the overall number of inspectors (validators) will decrease slightly.

The key question: Are we willing to reduce the number of “inspectors” slightly in exchange for a more efficient and precise system?

5. Does a Lower Staking Rate Threaten Network Security? Finding the Balance Between Security and Efficiency

The staking rate is one of the key indicators for assessing the security of a Proof-of-Stake (PoS) network. Currently, Solana’s staking rate is about 65.7%, significantly higher than many other PoS networks. However, SIMD-0228 may cause this number to decline, sparking concerns about network security.

Staking Rate Predictions and Security Thresholds

According to simulation data:

• At market equilibrium, the staking rate could drop from 65.7% to the 45–55% range.
• When the staking rate falls to 33.3%, the inflation rate will match the current fixed rate.
• In the worst-case scenario, the staking rate may drop even further, triggering a negative feedback loop.

The key question: What is the “sufficient” threshold for network security? Should it be 33%, 40%, or even higher? The community has not yet reached a consensus on this issue.

A Shift in the Security Model

At its core, SIMD-0228 represents a shift in Solana’s security model:

• Moving from “overpaying to ensure security” to “finding the minimum necessary cost.”
• Shifting from “fixed incentives” to “market-driven incentives.”
• Transitioning from “inflation-driven security” to “value-driven security.”

This shift reflects Solana’s transition from its early startup phase to a more mature stage. As network activity and MEV earnings increase, high inflation may no longer be necessary.

The chart below👇🏻 illustrates the relationship between staking rate and network security: As the staking rate increases, the cost of attacking the network rises, improving security. However, there is a point of diminishing returns, where increasing the staking rate further provides little additional security benefit.

Balancing Security and Capital Efficiency

SIMD-0228 is designed to maintain network security while improving capital efficiency. It aims to adjust Solana’s staking rate from a “possibly over-secured” state to a more balanced range, while still preserving a sufficient security margin.

💡 Beginner’s Explanation: Imagine a country’s military: Right now, 65.7% of the population is serving in the military, far beyond what is actually needed for defense. The new proposal might reduce this percentage to 45–55%, which is still enough to ensure national security while freeing up more people for economic activities. However, if the percentage drops too low (below 33.3%), it could threaten national security.

The key question: Where is the tipping point for security?

6. How Will the Relationship Between MEV and Inflation Change? The Impact of Revenue Source Shifts

As blockchain technology continues to evolve, the role and importance of MEV (Maximal Extractable Value) will keep expanding. The key challenge is balancing the economic incentives of MEV while maintaining decentralization and efficiency in the network.

With SIMD-0228 likely reducing inflationary rewards, MEV will become an increasingly important revenue source for validators. This shift could profoundly impact the validator revenue model and reshape Solana’s network dynamics.

Revenue Model Transformation

1. Shift in Primary Revenue Sources:

   • Traditionally, validators relied heavily on inflationary rewards as their main income.
   • If SIMD-0228 is implemented, MEV will gradually take over as a key revenue driver, reflecting a deeper evolution of blockchain economics.

2. MEV’s Rapid Growth:

   • Data shows that MEV has already become a major income source for validators.
   • In some quarters of 2024, MEV revenue even surpassed inflation rewards.
   • In 2024 alone, MEV generated approximately 3.7M SOL ($675M), demonstrating exponential growth.

Impact Analysis

1. Reduction in Inflationary Rewards:

   • SIMD-0228 aims to reduce inflation-based rewards, cutting validators’ earnings from inflation.
   • MEV, on the other hand, offers a rapidly growing alternative revenue stream.

2. Diversification of Validator Income:

   • The rise of MEV fundamentally alters validator income structures:
     • Inflation-based models offered stable and predictable rewards.
     • MEV-based models are more dynamic and volatile.

3. Changes in Network Dynamics:

   • Increased competition among validators to extract MEV.
   • Greater focus on block construction and transaction ordering strategies.
   • More complex incentive mechanisms for network participants.

Potential Risks and Challenges

1. Income Uncertainty:

   • The volatility of MEV earnings could:
     • Increase financial instability for validators.
     • Encourage more aggressive network participation strategies.
     • Potentially introduce new centralization risks.

2. Reshaping Blockchain Economic Incentives:

   • In 2024, MEV revenue (3.7M SOL) accounted for nearly 14% of the new token issuance through inflation.
   • MEV is becoming a revenue source comparable to inflation rewards.
   • Over the long term, this could fundamentally reshape blockchain incentive models.

Validator Behavioral Shifts and New Risks

This transition will lead to:

• Validators focusing more on MEV extraction rather than traditional inflation rewards.
• MEV optimization becoming a key competitive factor among validators.
• Network security shifting from being secured by inflation rewards to relying more on MEV income.

However, this also introduces new risks:

• MEV volatility could destabilize validator income.
• Validators may prioritize MEV profits over network security.
• Growing reliance on MEV infrastructure could create new centralization risks.

This transformation isn’t just an economic model change—it’s a fundamental restructuring of network security incentives.

💡 Beginner’s Explanation:
Imagine a blockchain as a busy restaurant, where transactions are customers. In the traditional model, the waiters (validators) earned fixed salaries (inflation rewards). Now, with the new model, they can earn extra tips (MEV) by providing better service.

In 2024, these “tips” skyrocketed—growing from $42M per quarter to $430M in Q4!
This means validators are shifting from passively collecting salaries to actively maximizing their earnings.

7. How is the “Leaky Bucket Effect” Quietly Eroding the Solana Ecosystem?

The authors of the SIMD-0228 proposal emphasize that inflation leads to a “leaky bucket effect”—a portion of value leaks out of the ecosystem through taxes and other channels. This concept is one of the key arguments in favor of SIMD-0228.

Inflation Data

• Market Cap: $80 billion
• Annual Inflation Rate: 4.779%
• Newly Issued Value Per Year: $3.82 billion

Multiple Channels of Value Leakage

1. Taxation: Compliance Costs
2. Centralized Exchange Fees
3. Overall Value Leakage Breakdown
   • Taxation Costs: $650M (68%)
   • Exchange Fees: $305M (32%)
   • Total Leakage: $955M (25% of new issuance value)

How SIMD-0228 Reduces the Leakage

Deep Economic Impact

1. Preserving Capital Within the Ecosystem

   • Reduces value extraction by external entities
   • Strengthens internal capital circulation
   • Enhances ecosystem self-sufficiency

2. Reconstructing Investor Incentives

   • Reduces selling pressure
   • Attracts long-term investors
   • Improves market expectations

3. Changing Capital Flow Dynamics

   • Boosts DeFi activity
   • Increases capital available for innovation
   • Encourages reinvestment within the Solana ecosystem

As Kamino co-founder Marius put it: “Staking encourages hoarding and reduces financial activity… similar to how the Federal Reserve raises interest rates to tighten financial conditions.” From this perspective, reducing inflation could enhance the overall vibrancy of the ecosystem.

The leaky bucket effect highlights an important economic truth: The resilience of an economic system isn’t just about how much capital exists, but also about how efficiently and where that capital flows.

SIMD-0228 represents a carefully designed economic intervention, marking a major evolution in Solana’s governance model.

💡Beginner’s Explanation:
Think of Solana as a giant reservoir of water:

• Before: Every year, nearly $1 billion leaked out of the system.
• Now: With better management, the leakage is reduced to less than $200 million.
• The result: Solana retains an extra $800 million within its ecosystem.

8. Could a Low Staking Rate Lead to Systemic Risks? Understanding the Potential Negative Feedback Loop

One of the major concerns surrounding SIMD-0228 is the potential negative feedback loop that could emerge if the staking rate drops significantly below current levels.

How a Negative Feedback Loop Could Occur

In the worst-case scenario, the following cycle might unfold:

1. Low staking rate (e.g., 30%) → Triggers an increase in the inflation rate
2. Higher inflation rate → Increases selling pressure, leading to a price drop
3. Falling prices → Lower validator yields, causing some validators to exit
4. Validators exiting → Further decline in the staking rate
5. If validator yields fall below 3.5%, a “penalty mechanism” may be triggered, accelerating stake withdrawals.

Key Considerations for System Stability

This negative feedback loop is not just a theoretical risk—it poses a real challenge to Solana’s network security and ecosystem stability. The key questions are:

• How can we ensure network security in a low-staking environment?
• How can we design an economic model that self-adjusts to prevent runaway risks?
• How can we stop small fluctuations from escalating into a full-blown crisis?

Potential Mitigation Strategies

To counteract this risk, several solutions could be considered:

• Smoother inflation adjustment mechanisms
• Dynamic staking reward structures
• Emergency buffer mechanisms to stabilize the network in extreme situations
• Strong community communication to reinforce investor confidence

Recovery Capacity Comparison

While these risks exist, SIMD-0228 is designed to be more resilient than the current fixed model:

• When the staking rate is low, it offers higher rewards to attract stake inflows.
• As the staking rate recovers, the inflation rate automatically decreases, creating a self-balancing mechanism.
• The adjustment coefficient (c ≈ π) in the formula ensures stronger incentives at low staking rates.

This adaptive mechanism is a key advantage of SIMD-0228 over the fixed model, though some risks remain in extreme scenarios.

💡 Beginner’s Explanation:
Think of this like a vicious cycle in an economic recession:

• Too many people withdraw money from banks (low staking rate).
• To attract deposits, banks raise interest rates (inflation rises).
• But high interest rates hurt the economy, so even more people withdraw money to cover their expenses.
• Banks start failing, causing panic and even more withdrawals…

This cycle is hard to break. While SIMD-0228 has built-in safeguards to prevent this, extreme conditions could still pose risks.

9. Future Outlook: How Will SIMD-0228 Transform the Solana Ecosystem?

If SIMD-0228 is implemented, it could have a profound impact on the Solana ecosystem, driving changes from short-term adaptations to long-term structural transformations.

Short-Term Adjustment Period (0–6 months)

• Staking rate gradually declines from 65.7% to the 50–55% range.
• Some small validators exit or get acquired.
• SOL price may receive support, attracting increased market attention.
• Validators adjust their business models to adapt to the new environment.

Mid-Term Transition Period (6–18 months)

• Validators shift focus toward MEV extraction optimization.
• New staking pools and services emerge to help stakers benefit from MEV.
• DeFi activity increases, with more applications utilizing unstaked SOL.
• Measures to reduce voting costs are introduced to help smaller validators survive.

Long-Term Structural Transformation (18+ months)

• Industry consolidation among validators, leading to greater specialization.
• Security incentives shift from inflation-based rewards to a market-driven incentive structure.
• Solana’s economic model transitions from “inflation-driven” to “usage-driven.”
• Solana could become a model for monetary policy innovation in other PoS networks.

💡 Beginner’s Explanation: Imagine a country transitioning from a planned economy to a market-driven economy:

• In the short term, there will be growing pains—some businesses will shut down.
• In the mid-term, new business models and services will emerge.
• In the long run, the economy will become more efficient.

Similarly, SIMD-0228 could transform Solana from a network that primarily relies on “printing money” (inflation rewards) to one sustained by real economic activity—a sign of maturity.

These changes will impact not only technology and economics but also the power dynamics and future trajectory of the entire ecosystem.

10. Conclusion: Evaluating SIMD-0228 from Three Dimensions

SIMD-0228 is not just a technical proposal—it represents a profound transformation of the Solana ecosystem across economics, governance, and technology. This proposal marks a major leap from simple inflation models to complex market mechanisms in the blockchain world.

Economic Dimension

• Reduces unnecessary token issuance, preventing value leakage.
• Adjusts inflation rates through market mechanisms, optimizing network security costs.
• Frees up capital for DeFi, improving overall capital efficiency.

Governance Dimension

• Demonstrates the Solana community’s ability to discuss complex economic models.
• Seeks a balance between optimizing resources and maintaining network health.
• Allows different stakeholders to express their positions and influence decision-making.

Technical Dimension

• Uses mathematical models to adjust core economic parameters.
• Designs dynamic response mechanisms to adapt to network changes.
• Provides new ideas for blockchain monetary policy.

Key Questions for the Future

As SIMD-0228 continues to be discussed and potentially implemented, several critical issues remain:

• Can the validator ecosystem maintain diversity?
• What new risks might come from increased MEV dependency?
• Can market-driven mechanisms remain stable under extreme conditions?
• Could this model be adopted by other blockchain networks?

💡 Beginner’s Explanation: SIMD-0228 represents the evolution of blockchain from “simple inflation rules” to “complex market-driven mechanisms”—much like how modern central banks replaced the gold standard. It’s a revolution because it fundamentally changes the rules. It’s also a natural evolution as the network matures and adapts to real-world economic needs. No matter the outcome, this is a major experiment in blockchain economics.

In a way, SIMD-0228 is both revolutionary and evolutionary—it introduces a radical shift in economic thinking while also marking Solana’s transition from an emerging blockchain to a mature financial infrastructure. Regardless of the final decision, this proposal and the extensive discussions it has sparked showcase the increasing sophistication of blockchain communities in economic design and governance.

11. Recommended Actions (If the Proposal Passes)

For Regular SOL Holders:

• If you hold SOL but don’t stake, SIMD-0228 could be beneficial, as lower inflation helps preserve the value of your holdings.
• If you are staking SOL, consider reassessing your staking strategy—you may need to choose validators that are effective at extracting MEV.
• Closely monitor the proposal’s implementation, especially changes in staking rates and SOL price movements.

For Validators:

• Large validators: Invest in MEV optimization technologies and prepare for a new revenue structure.
• Small validators: Evaluate economic viability, consider specialization or offering differentiated services.
• All validators: Keep an eye on the progress of voting cost reduction measures, as they could have a significant impact on the economic model.

For Developers:

• Prepare to leverage the potential increase in capital liquidity.
• Consider building tools that help stakers participate in MEV revenue sharing.
• Explore new use cases in DeFi that utilize SOL more efficiently.

💡 Beginner’s Explanation:
No matter if you’re a SOL holder, validator, or developer, you should prepare for the potential impact of SIMD-0228: Regular holders should follow updates on the proposal; Validators need to adapt their business models; Developers should look for new opportunities. Just like in any economic policy change, those who prepare in advance tend to benefit the most.

Final Thoughts

SIMD-0228 represents a critical turning point for Solana, marking its transition toward a more mature and market-driven economic model.

By introducing a dynamic inflation mechanism, this proposal aims to build a more efficient and sustainable ecosystem, ensuring network security while maximizing capital efficiency.

Like any major reform, it brings both opportunities and challenges, with supporters and critics on both sides. By understanding the motivations, mechanisms, and potential impacts behind this proposal, we can better prepare for the transition and find our place in the new economic landscape.

Regardless of the final outcome, the discussion around SIMD-0228 has already demonstrated the blockchain community’s ability to tackle complex economic issues through collective intelligence. This, perhaps, is one of the most revolutionary aspects of blockchain technology.

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