Equilibrium Infra Bulletin #46: SIMD-228, should it have passed?
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🔍 SIMD-228, should it have passed?
Solana recently voted on two governance proposals. The controversial of the two was SIMD-228, a proposal to (i) lower Solana’s current inflation rate and (ii) replace it with a market mechanism that “targets” a certain percentage of all SOL staked. The voting threshold required for protocol changes in Solana is 67%. SIMD-228 only received 59% of the votes and did not pass.
This post reviews arguments in favor and against the proposal and assesses their validity from the perspective of various ecosystem stakeholders (SOL owners, validators, developers, etc.). The key premise to understand is what inflation in blockchain systems is and isn’t because there is plenty of confusion around this simple mechanism.
The first level of the analysis is that inflation is a subsidy paid to validators at the expense of tokenholders
If all the SOL in the world is worth $100 and I own 1%, my share is worth $1. If $10 is paid out as an incentive to the validator(s), I own 1/110 of all tokens, and if the overall network value stays the same my $1 is worth less than before.
However, the second layer is that inflation isn’t really a cost because a market forms between tokenholders and validators.
The cost to run a blockchain validator is fixed (to a precise enough extent). You need a box that processes transactions and is connected to the Internet, costing $X per year. This creates a market where validators compete with fees for stake and competitive dynamics drive excess revenue back to SOL holders.
Our Thoughts
🤔 Argument: A high inflation rate creates needless amounts of sell pressure.
⚖️ Verdict: A real problem for somewhat frustrating reasons.
Solana’s initial inflation rate was 8%, which declines by ~15% annually. Today, it is at ~4.7%. That equates to ~$3.7 billion in value at current market prices.
This wouldn't be an issue in an “efficient" market as the only “outgoing” cost from the system would be validators. However, there are multiple other considerations:
Taxes. Most jurisdictions make validators forced sellers to cover tax liabilities.
Exchanges like Coinbase and Binance charge exorbitant fees relative to the market due to market positioning. This makes the sales burden higher than it should be.
SOL (non-staked) is often the asset people hold on exchanges. Since they aren’t receiving rewards, the return rate for stakers is artificially boosted. This is quite predatory and unnecessary.
The sum of these “unnecessary” sales is likely in the $1-2 billion range annually.
🤔 Argument: A target inflation/stake rate improves SOL liquidity in DeFi.
⚖️Verdict: True today, but not necessarily in the future.
Networks that launched as Proof-of-Stake on Day 1 (i.e., not Ethereum or Bitcoin) tend to have higher staking rates—65% of the SOL supply is staked, and 27% of ETH is.
The way for staked assets to participate in DeFi has been via LSTs (e.g. JitoSOL or stETH). There’s some additional risk and much of the staked supply never makes its way to an LST.
Naturally, this dynamic limits the amount of native assets that are in use in DeFi. While it is true that targeting a lower inflation rate improves liquidity, there are a few key considerations:
Increasing or decreasing the inflation rate target by a specific number feels inelegant — how do we reason about the optimal stake rate?
Solana stake accounts uniquely enable native stake to participate in DeFi. For whatever reason, this is an unknown feature but it’s being built by the ReflectCX team.
🤔 Argument: Lowering the inflation rate punishes smaller validators.
⚖️ Verdict: Yes, but the impact on overall network health is somewhat limited.
Per Helius, 49% of validators have their commission at 0% already. So a substantial number of validators aren’t impacted at all by the change.
However, many smaller validators who don’t have a large enough incentive to run at a loss will struggle. Many are already reliant on the Solana Foundation’s staking distribution program to stay in the market.
Should SIMD-0228 have passed?
There’s a strong argument for lowering inflation — however, it probably would have made more sense to then just continue a fixed schedule more aggressively and not introduce a more complex market mechanism.
While some argue that a market mechanism is more intelligent, it’s not clear that the specific mechanism of dynamically lowering or increasing rewards based on the stake rate is the market one should even optimize for.
💡 Research, Articles & Other Things of Interest
🤓 Dune dashboard on SIMD-228 voting tally with interesting graphs.
📚 SIMD-228 Critical Analysis by Helius.
🎧 Futarchy deep dive: can markets make better decisions? Interview with MetaDAO founder on Bell Curve (Blockworks podcast).
🔥 News From Our Partners
📈 Zeta rebrands perpetual exchange to Bullet and launches their testnet for their new product.
📜 MetaDAO futarchy market for creating a launchpad for token project passes.
🤌 Personal Recommendations From Our Team
📚 Reading: Unruly: The Ridiculous History of England's Kings and Queens. You’ve probably never thought about reading a book on early English monarchs, but this is your chance.
🎧 Listening: The real Tyrion Lannister. An analysis of how the character deviates from the TV series to the books, especially later on as the story unfolds.
💡 Other: A list of the Top 10 pizza slices in NYC - for those of you attending the Digital Asset Summit!