Why Solana Should Change Its Inflation Rate | Weekly Roundup

Understanding SIMD 228: Solana's Revolutionary Inflation Proposal

SIMD 228 is a groundbreaking proposal for the Solana blockchain that aims to revolutionize how inflation is managed within the ecosystem. Initially proposed by Multicoin Capital and later championed by Max Resnick, an economist at Anza (formerly Solana Labs), SIMD 228 represents a significant shift from Solana's current inflation model, which was originally borrowed from the Cosmos blockchain.

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The current Solana inflation model is hardcoded and follows a predetermined curve that decreases over time. This approach, while simple, fails to account for market conditions or network feedback. SIMD 228 proposes a more dynamic and responsive inflation mechanism that adapts to the network's needs and market realities.

At its core, SIMD 228 aims to target a specific staking rate on the Solana network. The proposal suggests that Solana may be overpaying for security in its current state. By implementing SIMD 228, the network could potentially reduce unnecessary inflation while still maintaining robust security measures.

The Mechanics of SIMD 228

SIMD 228 introduces a feedback loop into Solana's inflation model. If the staking rate falls below a certain threshold (proposed at 30%), the staking APY would automatically increase over a period of 10 epochs (approximately three weeks) until it reaches the target staking rate of 50%. This adaptive mechanism ensures that the network remains secure and attractive for validators and stakers alike.

One of the key advantages of SIMD 228 is its ability to respond to market conditions. Unlike the current time-based inflation model, SIMD 228 would allow Solana's inflation rate to adjust based on network activity, revenue, and other relevant factors. This responsiveness could lead to a more efficient allocation of resources within the Solana ecosystem.

The Case for Changing Solana's Inflation Rate

Proponents of SIMD 228 argue that the current inflation model is inefficient and potentially wasteful. A significant portion of the inflated tokens ends up in the hands of intermediaries such as custodial exchanges, resulting in hundreds of millions of dollars per year being distributed without necessarily benefiting the network's security or development.

Dan Smith from Blockworks Research, a guest on the podcast, expressed support for SIMD 228, stating, "I personally think those miss the point. Like you're never going to in a complex system derive perfect initial conditions. That's just never going to happen. The only thing you can really do in my view is set the system to take in feedback properly from reality."

This sentiment echoes the broader argument that blockchain networks should be adaptive and responsive to real-world conditions rather than relying on rigid, predetermined economic models.

Potential Impact on Solana's Tokenomics

Implementing SIMD 228 could have far-reaching effects on Solana's tokenomics. By potentially reducing inflation, the proposal could lead to a more favorable supply-demand balance for SOL tokens. This, in turn, could make Solana more attractive to long-term holders and institutional investors.

Moreover, the adaptive nature of SIMD 228 could help Solana maintain a healthy balance between network security and economic efficiency. By targeting a specific staking rate, the proposal aims to ensure that the network remains secure without overpaying for that security.

Concerns and Counterarguments

Despite the potential benefits, SIMD 228 has faced some opposition within the Solana community. Some critics argue that reducing inflation could make Solana less attractive to institutional investors who may be drawn to higher staking yields. However, proponents of the proposal counter that focusing solely on nominal yields ignores the importance of real rates and overall network health.

Another concern raised is the potential impact on smaller validators. Some worry that if issuance drops significantly during a bear market, smaller validators might become unprofitable. However, supporters of SIMD 228 argue that this scenario is largely theoretical and that the Solana Foundation has mechanisms in place to support essential network participants if needed.

SIMD 228's Impact on Solana's Decentralization

A key point of discussion surrounding SIMD 228 is its potential impact on Solana's decentralization. Critics argue that reducing inflation could lead to a decrease in the number of validators, potentially centralizing the network. However, proponents of the proposal offer a more nuanced view of decentralization.

Mert, one of the podcast hosts, emphasized that "decentralization is not something you want to fake or inflate. Because then you have a false sense of security and when something happens, like that's all it takes. That's what we call a black swan." He argued that true decentralization is about more than just the number of nodes; it's about the distribution of stake, geographical diversity, and the independence of node operators.

The discussion highlighted that while SIMD 228 might lead to some consolidation among validators, it could ultimately result in a more robust and truly decentralized network by incentivizing efficiency and rewarding validators who add genuine value to the ecosystem.

The Broader Implications for DeFi and Blockchain Economics

The SIMD 228 proposal has implications that extend beyond Solana. It represents a shift in thinking about blockchain economics and could influence how other networks approach inflation and validator incentives.

One argument made in favor of SIMD 228 is that by potentially lowering staking yields, it could drive more activity towards Solana's DeFi ecosystem. The reasoning is that if staking yields become less attractive, users might be more inclined to explore other yield-generating opportunities within the Solana ecosystem.

However, this point was debated among the podcast participants. Jack, another host, expressed skepticism about this argument, stating, "I don't know if that's a reason that I'm like super for it, right? We're going to bring down the hurdle rate. We'll get more DeFi activity. Like maybe I think there's a pretty good argument for that to be had. But it's not just one to one there for me."

The Role of the Solana Foundation

The discussion touched upon the role of the Solana Foundation in implementing and supporting SIMD 228. The Foundation's delegation program was mentioned as a potential backstop for smaller validators who might struggle under the new economic model.

However, the hosts emphasized that reliance on the Foundation's support should be seen as a temporary measure rather than a long-term solution. The goal is to create a self-sustaining ecosystem where validators can thrive based on the value they provide to the network, rather than relying on artificial support mechanisms.

Comparing Solana to Other Blockchain Networks

Throughout the discussion, comparisons were drawn between Solana and other blockchain networks, particularly Ethereum. The hosts noted that Solana's current inflation rate is approximately twice that of Ethereum, suggesting that there might be room for optimization.

However, they also cautioned against oversimplifying these comparisons, noting that different networks have different security models and economic structures. The goal of SIMD 228 is not necessarily to mimic other networks but to create an economic model that is optimized for Solana's unique characteristics and goals.

The Voting Process and Community Engagement

The podcast highlighted the importance of community engagement in the SIMD 228 voting process. At the time of recording, the proposal was about to go live for voting, with the hosts encouraging listeners to participate and make their voices heard.

The discussion around SIMD 228 has been one of the most divisive in recent Solana history, reflecting the proposal's significance and the complexity of the issues it addresses. This level of engagement is seen as a positive sign for Solana's governance process, demonstrating the community's active involvement in shaping the network's future.

Potential Outcomes and Future Adjustments

The hosts emphasized that regardless of whether SIMD 228 passes, the discussion it has sparked is valuable for Solana's development. If implemented, the proposal includes mechanisms for future adjustments based on real-world outcomes.

Dan Smith noted, "If it doesn't pass, well, there'll be more chances to do another proposal to change the curve and whatnot. Now, I think they'll be higher risk at that point because the network arguably will be bigger. So that's kind of reason to do it now."

This adaptability is seen as a key strength of the proposal, allowing the Solana community to fine-tune its economic model based on empirical data rather than theoretical assumptions.

The Importance of Data-Driven Decision Making

A recurring theme throughout the discussion was the importance of data-driven decision making in blockchain governance. The hosts emphasized the need to look beyond surface-level metrics and consider the complex interplay of factors that contribute to a network's health and security.

Mert cautioned against misinterpreting data, stating, "Misinterpreting data is much worse than not having data. And I mean infinitely worse because you get false certainty." This highlights the need for careful analysis and a nuanced understanding of blockchain economics when evaluating proposals like SIMD 228.

Solana's Evolution and Market Maturity

The discussion around SIMD 228 reflects Solana's evolution as a blockchain network. As the ecosystem matures, it faces new challenges and opportunities that require innovative solutions. The proposal represents a shift from the initial bootstrapping phase of the network to a more sustainable long-term economic model.

Dan Smith framed this evolution in terms of market maturity, stating, "If you look at Ethereum, you know, you have something like 10,000 nodes on the network and, you know, that's, that's their MO. They even wanted, they, on the spectrum of decentralization, their goal has been to max out on the decentralization side. And then you look at one of the, you know, like gen three newer chains, like Aptos or Sui, and something nodes. And that's like pretty intentional and no plans to scale in the near term."

This comparison highlights how different networks approach the balance between decentralization, efficiency, and economic sustainability. Solana, through proposals like SIMD 228, is carving out its own path that aims to combine the best aspects of different approaches.

The Global Context: Crypto Policies and Strategic Reserves

The podcast briefly touched upon a broader geopolitical context, discussing a recent announcement by former President Trump about creating a strategic crypto reserve that would include Solana, XRP, and Cardano.

While the hosts were generally skeptical of this idea, particularly the inclusion of assets beyond Bitcoin, it sparked an interesting discussion about the potential future role of cryptocurrencies in national economic strategies. This context underscores the growing importance of projects like Solana in the global financial landscape.

Innovations in Block Production: Flash Blocks on Base

The podcast concluded with a discussion of recent innovations in block production, particularly the introduction of "flash blocks" on the Base blockchain. This technology, inspired by Solana's concept of "shreds," aims to improve transaction speed and efficiency.

However, the hosts expressed concerns about how these innovations are being marketed, particularly claims that Base would be faster than Solana. Mert provided a detailed explanation of how Solana's shred system works and how it compares to Base's flash blocks, highlighting the importance of accurate technical comparisons in the blockchain space.

The Future of Blockchain Economics

As the discussion around SIMD 228 and other blockchain innovations demonstrates, the field of blockchain economics is rapidly evolving. Networks like Solana are at the forefront of experimenting with new models that balance security, efficiency, and decentralization.

The ongoing debate around inflation, validator incentives, and network governance reflects the broader challenges facing the blockchain industry as it moves towards mainstream adoption. Proposals like SIMD 228 represent important steps in refining these systems and creating more sustainable and efficient blockchain networks.

Conclusion: Solana's Path Forward

The discussion of SIMD 228 on the Lightspeed podcast highlights Solana's commitment to innovation and continuous improvement. By considering such a significant change to its economic model, Solana demonstrates its willingness to adapt and evolve based on real-world feedback and changing market conditions.

As the Solana community prepares to vote on SIMD 228, the proposal serves as a catalyst for important discussions about the future of blockchain economics, decentralization, and network security. Regardless of the outcome, these conversations will play a crucial role in shaping Solana's path forward and influencing the broader blockchain ecosystem.

The hosts' final thoughts emphasized the importance of proactive development and not resting on past successes. As Mert eloquently put it, "The whole point of acceleration is this: stress the system, make it better in the way that we think it will get better. If it doesn't, we learned and we will adjust. But if you do nothing, then we're kind of just waiting and like this passive game in my view does not work."

This forward-thinking approach, combined with a commitment to data-driven decision making and community governance, positions Solana well for continued growth and innovation in the dynamic world of blockchain technology.

Facts + Figures

• SIMD 228 is a proposal to change Solana's inflation model from a time-based curve to a market-based approach targeting a 50% staking rate.
• Currently, over 90% of Solana's inflation goes to stakers, with only 10% going to validators, suggesting potential over-issuance.
• Solana's current inflation rate is approximately twice that of Ethereum.
• The proposal suggests adjusting staking APY over 10 epochs (about three weeks) if the staking rate falls below 30%.
• Roughly 63% of Solana is currently staked, with an additional 10% estimated to be in liquid staking tokens.
• Running a Solana validator costs approximately $10,000-$12,000 per year in hardware costs and $50,000 per year in voting costs.
• The Solana Foundation delegation program is mentioned as a potential backstop for smaller validators if SIMD 228 is implemented.
• Base blockchain's "flash blocks" technology is inspired by Solana's concept of "shreds."
• Solana's current block time is 400 milliseconds, with individual shreds potentially taking 15-20 milliseconds.
• The podcast mentions a proposed U.S. strategic crypto reserve that would include Solana, XRP, and Cardano.
• The voting process for SIMD 228 was about to go live at the time of the podcast recording.
• The discussion around SIMD 228 is described as one of the most divided in recent Solana history.
• Helius, a major Solana validator, controls approximately 3.5% of the network's stake.
• Some entities on the Solana network are said to control over 10% of stake spread across multiple unlabeled nodes.
• The Gito auction on Solana runs for approximately 200 milliseconds.

Questions Answered

What is SIMD 228?

SIMD 228 is a proposal to change Solana's inflation model from a time-based approach to a market-based one. It aims to target a specific staking rate on the network, adjusting inflation based on network conditions rather than following a predetermined curve. The proposal suggests that if the staking rate falls below 30%, the staking APY would increase over 10 epochs until it reaches the target 50% staking rate.

How does SIMD 228 differ from Solana's current inflation model?

SIMD 228 introduces a dynamic, feedback-driven inflation model, unlike Solana's current hardcoded, time-based approach. The current model decreases inflation over time regardless of network conditions, while SIMD 228 would adjust inflation based on factors like staking rates, network activity, and revenue. This allows for more responsive and efficient resource allocation within the Solana ecosystem.

What are the potential benefits of implementing SIMD 228?

Implementing SIMD 228 could lead to more efficient use of network resources, potentially reducing unnecessary inflation. It may improve Solana's tokenomics by creating a more favorable supply-demand balance for SOL tokens. The proposal aims to maintain network security while optimizing economic efficiency, potentially making Solana more attractive to long-term holders and institutional investors.

How might SIMD 228 affect Solana's decentralization?

While some argue that SIMD 228 could reduce the number of validators, potentially centralizing the network, proponents suggest it could lead to a more robust and truly decentralized system. The proposal may incentivize efficiency and reward validators who add genuine value to the ecosystem. True decentralization is emphasized as being about more than just node count, including factors like stake distribution, geographical diversity, and node operator independence.

What concerns have been raised about SIMD 228?

Some critics worry that reducing inflation could make Solana less attractive to institutional investors seeking high staking yields. There are concerns that smaller validators might become unprofitable, especially during bear markets. However, supporters argue that these scenarios are largely theoretical and that mechanisms exist to support essential network participants if needed.

How does SIMD 228 compare to inflation models on other blockchains?

SIMD 228 represents a unique approach to blockchain inflation, distinct from models used by networks like Ethereum or Bitcoin. While it's noted that Solana's current inflation rate is about twice that of Ethereum, the proposal aims to create an economic model optimized for Solana's specific characteristics and goals, rather than mimicking other networks.

What role does the Solana Foundation play in relation to SIMD 228?

The Solana Foundation's delegation program is mentioned as a potential backstop for smaller validators who might struggle under the new economic model proposed by SIMD 228. However, it's emphasized that reliance on the Foundation's support should be seen as a temporary measure rather than a long-term solution, with the goal being a self-sustaining ecosystem.

How does Solana's "shred" system compare to Base's "flash blocks"?

Solana's shred system continuously streams small pieces of blocks (shreds) until a full block is built, with individual shreds potentially taking 15-20 milliseconds. Base's flash blocks technology is inspired by this concept but implements it differently, notably including a per-block auction mechanism. The podcast hosts express concerns about how these technologies are being compared and marketed, emphasizing the need for accurate technical comparisons in the blockchain space.