Questions and Answers: A comprehensive analysis of Solana's latest proposal SIMD-0228 will have an impact on the industry?

Author: Scof, ChainCatcher

Edited by: TB, ChainCatcher

What is SIMD-0228?

SIMD-0228 is mainly proposed by Multicoin Capital investor Vishal Kankani, aiming to adjust the inflation mechanism of the Solana network to make it more intelligent and can automatically adjust the SOL issuance volume based on market dynamics and pledge situations.

The current SOL issuance mechanism is a fixed timetable and will not change according to network activity, which is a "blind issuance". The proposal proposes a "smart inflation" mechanism, which allows SOL's issuance to dynamically adapt to market demand, so as to improve network security and reduce unnecessary inflation pressure.

Why adjust the issuance mechanism of SOL?

With the development of the Solana ecosystem, the profits of stakers are no longer entirely dependent on SOL issuance, but are increasingly coming from MEV (maximum extractable value). Data shows that in the fourth quarter of 2024 alone, MEV revenue in the Solana network reached about 2.1M SOL (approximately US$430 million), a few times higher than the previous quarter. This means that even if SOL issuance is reduced, the network can still attract enough stakeholders to ensure security. Therefore, the proposers believe that optimizing inflation strategies and no longer blindly issuing redundant SOLs can enable the network to develop healthily.

What problems did SIMD-0228 solve?

1. Reduce centralized risks : High inflation can easily allow SOLs to gradually concentrate in the hands of big stakers, and reducing inflation will help more users hold SOLs and maintain decentralization.
2. Promote DeFi development : Reducing inflation helps increase SOL usage in DeFi applications, rather than being heavily used for staking mining.
3. Reduce selling pressure and stabilize price : High inflation means more SOLs need to be sold to pay taxes, while reducing inflation can reduce selling pressure in the market, helping SOL prices stabilize.
4. Improve market awareness : Although SOL inflation is not technically direct cost, the market often sees it as a long-term price pressure. Optimizing the inflation mechanism can improve SOL's positioning and perception in the market.

How does the “smart inflation” mechanism work?

The “smart inflation” mechanism proposed in this proposal has two core goals:

1. Dynamic incentive pledge - When the pledge rate drops, the system will automatically increase the issuance volume to inspire more people to participate in pledge, thereby maintaining network security.
2. Minimum necessary inflation (MNA) – Minimize unnecessary SOL issuance as much as possible, and issue only the minimum amount of SOL required to maintain network security, avoiding selling pressure from excessive SOLs in the market.

The core of this proposal is the new SOL issuance calculation formula, which automatically adjusts the issuance volume of SOL based on the staking rate (s). If the pledge rate is high (such as more than 50%), the inflation rate will decrease; if the pledge rate is low (such as less than 33%), the inflation rate will rise to ensure sufficient security. The new issuance mechanism will be gradually transitioned within 50 Epochs (approximately 25 days) to ensure smooth implementation.

What impact will it have on all parties in the ecological field?

This proposal reform is essentially a rebalancing of power between large coin holders, verifiers and ecological builders. Once the proposal is approved, the pledge yield will drop from 7.03% to 1.41%, and validators will shift from relying on inflation to focusing on acquisition of MEV and transaction fees – both an opportunity and a challenge

For investors holding large SOLs, a decrease in inflation helps reduce token dilution and maintain the value of their holdings. However, the pledge yield may plummet from the current 7.03% to 1.41%, which means that big coin holders need to reevaluate their investment strategies and may need to weigh between pledge and other earning channels.

The revenue structure of validators will change significantly. As staking yields fall, validators will have to rely more on sources of income such as maximum withdrawable value (MEV) and transaction fees. This may prompt validators to actively participate in network activities to compensate for the reduction in staking income. However, for smaller or limited resources, a decline in revenue may lead to increased operational pressure and may even exit the network, affecting the degree of decentralization of the network.

For eco-builders, reducing inflation may drive more SOLs into the DeFi ecosystem, increasing liquidity and user engagement. This provides more opportunities for eco-builders to develop and promote new DeFi products and services to promote ecosystem prosperity. However, this also depends on the market's acceptance of the new mechanism and changes in user behavior

**Community view: In a spiral of debate on inflation, can Solana

escape?**

Although the official voting has not begun yet, this proposal blueprint has triggered heated discussions in the community about the "inflation spiral" and interest game.

David Grider, former Grayscale researcher, built a model to analyze the number of validators that can make profits using the current and recommended SMID-0228 inflation rate, as well as different Solana fee/price drop schemes. The results show that after the proposal is adopted, Solana may lose about 50 to 250 additional validators under different revisions.

Community member Leapfrog bluntly stated in solana's developer forum that the proposal "has a catastrophic impact on Solana." He believes that if inflation rises when investment confidence is low, that is, investors withdraw and sell, this will aggravate panic and create a death spiral. No matter how big the bet returns are, volatile assets are not suitable for long-term large investors.

Multicoincap's managing partner said that it is a consensus that the current inflation rate is too high and action should be taken as soon as possible. He is not concerned about consensus security, but admits that validators' profitability may be affected and some are expected to exit the network. He stressed that excessive caution may lead to "analytic paralysis" and hinder Solana's development, so it should be maintained at a rapid pace to avoid falling into a dilemma similar to Ethereum.

However, market analysts believe that as the main holder of SOL, Multicoin Capital promotes the SIMD-0228 proposal, aiming to alleviate the selling pressure of SOL and enhance its value storage function by reducing inflation.