Proposed Solution to Address Solana’s Inflation
Solana’s native crypto, SOL, faces inflation issues due to its current fixed-rate issuance model. To address this problem, Multichain Capital partners Tushar Jain and Vishal Kankani have introduced a proposal that aims to introduce a market-driven mechanism to adjust Solana’s emissions dynamically.
Current Emissions Mechanism
Solana’s existing emissions mechanism, established in 2021, follows a rigid, time-based schedule that doesn’t consider the network’s activity or economic conditions. Critics have dubbed it “dumb emissions” for its inability to adapt to market realities.
Changes to Emissions
The proposed solution, known as “Smart Emissions,” aims to introduce a programmatic, market-based mechanism that will dynamically adjust SOL issuance based on staking participation.
The key features of the proposed mechanism include:
- Reducing emissions when stake participation exceeds a recommended target rate of 50%
- Setting an upper bound at the current emission curve to reduce emissions until they reach a stable mark of 1.5%
- Using a formula tied to staking participation, MEV revenues, and validator commissions to ensure that changes are proportional to network conditions
Benefits and Rationale
The proposal argues that reducing inflation would spur greater adoption of SOL in DeFi, and lower “risk-free” inflation rates could stimulate the development of new protocols and economic activity.
The proposal also highlights the robust economic activity on Solana, citing that SOL stakers earned 2.1 million SOL, worth roughly $430 million, in Maximum Extractable Value (MEV) in the fourth quarter. With MEV revenues steadily increasing, the reliance on token emissions to attract stakers is waning. The proposal argues that Solana’s fixed emissions now result in unnecessary inflation, creating sell pressure and diluting token value.
Market Perception and Risks
High inflation affects token holders and creates a perception of instability in the network. The authors liken Solana’s current inflation model to a public company issuing new shares every two days, leading to continual downward price pressure.
The proposal aims to instill confidence among investors and stakeholders by transitioning to the aforementioned dynamic system.
The proposed design also addresses theoretical risks, such as long-range attacks, by ensuring staking participation remains above critical thresholds (33% for safety, with a target of 50%).
Conclusion
The proposed solution aims to address Solana’s inflation issues by introducing a market-driven mechanism to adjust SOL issuance dynamically. By tying emissions to real-time conditions, the network becomes more responsive to economic activity, enhancing security and decentralization. The proposal emphasizes the role of market mechanisms in achieving optimal outcomes, stating that “markets are the best mechanism in the world to determine prices, and therefore, they should be used to determine Solana’s emissions.”
FAQs
Q: What is the current emissions mechanism on Solana?
A: Solana’s current emissions mechanism follows a rigid, time-based schedule that doesn’t consider the network’s activity or economic conditions.
Q: What is the proposed solution?
A: The proposed solution, known as “Smart Emissions,” aims to introduce a programmatic, market-based mechanism that will dynamically adjust SOL issuance based on staking participation.
Q: What are the key features of the proposed mechanism?
A: The key features of the proposed mechanism include reducing emissions when stake participation exceeds a recommended target rate of 50%, setting an upper bound at the current emission curve to reduce emissions until they reach a stable mark of 1.5%, and using a formula tied to staking participation, MEV revenues, and validator commissions to ensure that changes are proportional to network conditions.
Q: What are the benefits of the proposed solution?
A: The proposed solution aims to reduce inflation, spur greater adoption of SOL in DeFi, and stimulate the development of new protocols and economic activity.
Q: What are the risks associated with the proposed solution?
A: The proposed solution addresses theoretical risks, such as long-range attacks, by ensuring staking participation remains above critical thresholds (33% for safety, with a target of 50%).
