Solana’s Increasing Fee Revenue

Solana's normal transaction fees have increased significantly in recent weeks. We believe there is room for fees to grow even further if the current favorable market conditions continue and user activity accelerates. There is clearly an elevated level of demand for Solana blockspace with the fast increase in priority fees. In addition, a recent SIMD (Solana IMprovement Document) that has just been approved, 0096 (Rewarding full priority fees to validators), is poised to result in even more transaction fee revenue being directed to validators instead of being burned (50% of the priority fee is currently burned). Such trends will play favorably for purchasers who look at metrics such as validator profitability and network revenue generated when making fundamental valuation assumptions. Most importantly, this makes the case for decreasing emissions over the long term, validators being compensated by organic fee revenue, and minimizing out-of-protocol payments as none of the priority fee will be burned. Solana’s current inflation rate stands at ~5.5% and will decrease by 15% every year until it reaches a long-term inflation rate of 1.5%.

Solana fees are poised to potentially increase further given ongoing talks of a revamp of Solana’s fee markets, including a rehaul of execution economics, which, if proposed in its current design, would introduce a dynamic base fee mechanism for each account, scaled with the number of CUs used for write lock contention. Accounts would maintain an exponential moving average (EMA) of CUs used per block, and if the EMA exceeds 50% of the write lock (specifying which accounts you are writing) CU limit for 30 slots (6M CUs), then the write lock fee increases by 12.5%. This means that if an account was consistently using more than 50% of the CU limit of a single thread, its write lock fees (fees paid when a user wants to write a specific account) will continue to increase exponentially. This fee would be applied to the number of CUs used, rather than the current fee model where there is a flat base fee per signer. Once this write lock EMA exponential fee is introduced and implemented, there are further plans to develop and implement exponential global base fees. 

Once SIMD-0096 is implemented and if these other potential SIMDs are approved, and with the increasing transaction fees (normal transaction fee + priority fees) the network is seeing, Solana has the ability to sustain strong fee revenue growth, which would be a driver of fundamental value to the token.