SIMD-228 Proposal and Its Implications

The SIMD-228 proposal aims to cut SOL inflation by 80% and has gained 35.7% support from Solana validators so far.

According to data from Dune Analytics, 701 out of the 1327 active Solana (SOL) validators have voted. Among these, 1.2% abstained, 17.2% opposed the proposal, and 37.5% supported it. If SIMD-228 were to be approved, it would drastically reduce staking rewards, limiting the influx of new SOL tokens into circulation.

Concerns have been raised regarding potential impacts on the network’s decentralization, even though the proposal might relieve selling pressure. Currently, Solana’s inflation models balance transaction fee burning and staking rewards. More fees are burned during high network traffic, helping mitigate inflation. However, decreased transaction costs have led to fewer tokens being removed from circulation, exacerbating the supply issue.

With a current inflation rate of 6.8%, staking incentives contribute to an increasing supply of SOL, which could press down its price. The SIMD-228 proposal, by lowering staking rewards, would reduce supply and may increase SOL’s value. Conversely, smaller validators with low or no commission rates could struggle to remain profitable, possibly exiting the network.

A significant exit of validators could weaken the network’s decentralization, raising concerns about long-term viability. Before selecting SIMD-228, Solana’s developers explored various alternatives, including fixed-rate adjustments.

Meanwhile, Solana’s market performance has struggled recently. As of March 13, SOL is trading at $126, more than 50% below its peak of $293 in January. According to DefiLlama data, decentralized finance activity has decreased, evident by a drop in the network’s total value locked from $12 billion in January to $7 billion.

Due to low network usage, particularly as memecoin trading has cooled, monthly fees have also fallen significantly, from $250 million in January to $89 million in February. While approving SIMD-228 might alleviate some supply pressure, its effectiveness hinges on expanding network demand. Simply reducing inflation may not suffice for a robust recovery in the absence of increased user activity.