Interpretation of Solana SIMD 228 Proposal: Reduce SOL inflation and reshape the pledge economy

Author: Carlos

Source:Carlos X Account

Compiled by: Deep Tide TechFlow

@solana **** SIMD 228 proposal has reached the quorum, with 70% of people voting for it. The vote will end at the 755th Era, about 52 hours later.

What is SIMD 228?

What is the reason for support?

What are the reasons for opposition?

Let's take a look in depth together.

SIMD 228 proposes a static curve to reduce the issuance of SOLs based on the staking participation rate. With the current pledge rate of 64%, after SIMD 228 is implemented, the inflation rate of SOL will drop to about 0.92% after a period of smoothing. It is worth noting that when the staking rate is below 50%, the curve becomes more radical, making the new issuance rate above the current fixed issuance plan, which is particularly obvious when the staking participation rate is equal to 1/3 (about 33.3%).

Reasons for support

Reason 1 for support: Solana currently pays too much for security.

The most effective token issuance rate is the lowest level required to ensure network security. The original author of the proposal ( @TusharJain_ , @kankanivishal ) pointed out that the fixed issuance plan is reasonable when Solana is still an emerging ecosystem without real economic value (REV). At that time, relying on token issuance to attract stakes and ensure security was necessary.

However, given the current economic activity and expense (REV) levels of the network, a fixed issuance plan has become less reasonable because it issues SOLs that exceed the amount currently required to ensure network security. This is called the "lost bucket problem", which @MaxResnick1 defines as a transfer of losses due to taxes or a middleman with market power (such as high commission validators like Coinbase or Binance).

Support reason 2: Nominal rate of return and real rate of return.

As @y2kappa points out, SOL issuance is an accounting technique that only dilutes unsolicited SOL holders and leads to artificial high yields, which incentivizes indiscriminate pledges without distinguishing between nominal (issuance-based) and actual (REV-based) yields. As Solana matures, the network should become economically sustainable and operate entirely on fees, reflecting the real economic need to trade on the network.

**Support reason 3: The market is the best mechanism for determining

prices, and Solana 's issuance should not be an exception.**

The conclusion of the above argument is that even if SIMD 228 is not perfect, the market-based approach is significantly improved over the current fixed issuance plan, which is arbitrary and inefficient, resulting in an increase in selling pressure.

Reasons for opposition

**Reason for opposition 1: SOL inflation subsidizes institutional

allocations.**

While token holders should only care about the actual rate of return, the opposite is true for custodians and ETP issuers. They are motivated to pursue the highest nominal rate of return possible because they charge commission rates and are not exposed to underlying assets (thanks to @smyyguy 's framework).

Taking pledged SOL ETP as an example, the ETP issuer receives a portion of the pledge reward but is not exposed to the underlying assets (i.e. SOL). Therefore, high nominal yields incentivize these players to sell SOL products to customers to increase their revenue. From this perspective, what Resnick calls the "lost bucket problem" is actually a distribution expenditure ( @calilyliu ). In my opinion, this is the most powerful argument against SIMD 228.

Reason 2 for objection: Institutional attraction.

This is related to the above viewpoint. According to @calilyliu , changing the fixed issuance plan before institutional interest reaches its peak and the Solana ETF goes live (probably this year). Liu’s core argument is that market-based approaches make inflation unpredictable and unstable, reducing the attractiveness of SOL as an asset.

The rebuttal to this is that SOL is an overly volatile asset, and its 7-8% yield is not a reason to buy, and those who stop buying SOL because of a decline in nominal yield have not understood its investment logic from the very beginning.

**Reason 3 for objection: Impact on validator profitability/reduced

number of validators.**

Voting fees, denominated in SOL, are the largest current spending for validators. Some people ( @David_Grid ) are concerned that SIMD 228 may have an impact on the profitability of small validators, especially as network activity and REVs are declining from current levels. In other words, the inflation curve of SIMD-228 may lead to a shrinking validator population, although some estimates believe that this impact is limited (in the 70% staking scenario, the number of profit validators will be expected to decline by 3.4% according to estimates from @0xIchigo and @lostin ).

There are also some minor concerns about the possible impact of SIMD 228, including the potential impact on Solana DeFi interest rates, whether inflation will increase SOL selling pressure, insufficient proposal discussions, etc.

Regardless of how validators vote, it is crucial to understand both parties’ perspectives to make informed decisions.

If passed, SIMD 228 will be implemented in a few months, after which there will be a 50-epoch (about 100 days) transition period to smooth the curve between the old and new rates.

Note: As of the time of publication, the voting for this proposal SIMD-0228 has not been approved yet. The proposal received a 61.39% approval rating (only versus versus versus versus) which was below the required 66.67% pass threshold.