SIMD 228: Reducing SOL’s Inflation

We believe that SIMD 228 is a net positive for Solana’s network health since it changes SOL’s inflation from an arbitrary and inefficient fixed emission schedule to a dynamically-adjusted mechanism based on the staking participation rate. 

The two most significant impacts of SIMD 228 would be:

1. A decrease in the dilution of non-stakers
2. An increase in the amount of SOL deployed into Solana’s DeFi ecosystem. 

First, a high inflation rate dilutes non-stakers, concentrating network ownership into the hands of stakers over time. While one can argue that this isn’t necessarily wrong, it can create a negative market perception and disincentivize specific market participants from owning the asset. For instance, imagine SOL ETFs were approved in the U.S. but do not allow for staking, which is the exact situation of the current ETH ETFs. Investors of the SOL ETF would need to consider the effects of dilution, which distorts the market’s price signal over the long term. 

Discussions and controversy surrounding SOL’s inflation rate illustrate the negative perception described above, with many in the Solana community arguing it’s too high. Even Anatoly Yakovenko, co-founder of Solana, has mentioned that inflation “is probably too high right now. It could actually be ten times lower and everything would be fine.” One way to visualize how dilution distorts the market’s price signal over the long term is by looking at SOL’s market cap vs. price performance, as shown in the chart below. However, it is important to note that team and investor unlocks drove a significant part of this dilution.