Solana is once again at the forefront of blockchain innovation, but this time, it’s tackling a critical issue: inflation. A recent proposal by Multicoin Capital, one of the early investors in Solana, could drastically reshape the way SOL tokens are distributed, potentially cutting inflation but also lowering staking yields. This proposal, presented through a Solana Improvement Document, seeks to move away from the network’s fixed inflation schedule and adopt a market-based model.
Currently, Solana’s inflation rate is set at 8%, gradually decreasing by 15% each year until it reaches 1.5%. However, with the current inflation mechanism, new SOL tokens are issued to validators and passed along to stakers. The issuance dilutes non-stakers’ holdings, but it also incentivizes staking, which plays a crucial role in securing the network. However, Multicoin believes there’s room for improvement.
The firm’s proposal sets a target staking rate of 50% to ensure the network remains secure and decentralized. If more than 50% of SOL tokens are staked, the network would decrease its issuance, reducing staking yields. On the flip side, if less than 50% of SOL is staked, issuance would increase to boost staking rewards. This market-based inflation mechanism would fluctuate between a minimum of 0% inflation and a maximum based on the current issuance curve.
Multicoin Capital’s vision is to reduce the overall inflation of SOL for several reasons. First, high inflation currently leads to network centralization, as new SOL is only passed to stakers. This also creates a high opportunity cost for not staking, diminishing SOL’s potential utility in decentralized finance (DeFi) projects. Additionally, only 9% of staked SOL is liquid, creating an imbalance between stakers and non-stakers. The proposal suggests that by lowering inflation, Solana would become more attractive for broader use cases beyond staking, helping to elevate the token’s appeal in global markets.
Interestingly, while inflation does not directly create or destroy value (as Solana co-founder Anatoly Yakovenko puts it, inflation is merely “accounting”), its negative perception in the market can have significant consequences. By focusing on limiting inflation, Multicoin Capital hopes to present SOL as a more attractive asset with reduced dilution risk, similar to the “ultrasound money” narrative that helped Ethereum gain favor after its switch to proof-of-stake.
Yet, the proposal isn’t without its risks. Historically, Solana staking yields have remained above 7%, providing lucrative returns for stakers. With reduced issuance, those yields could take a hit. While growth in miner extractable value (MEV) rewards might offset this, the reduced staking rewards could lead to fewer people willing to stake, potentially lowering network security.
While the proposal has drawn some inspiration from Ethereum’s move to a lower inflation model, there are also lessons to be learned from other networks like Cosmos, which has faced community pushback over its market-based inflation model.
In the coming months, it will be interesting to see whether the Solana community embraces Multicoin’s bold proposal, or if the plan will face resistance. Regardless of the outcome, the debate over inflation highlights the delicate balancing act that blockchain networks must perform to maintain security, incentivize staking, and reduce dilution—all while adapting to an ever-changing market.
