Multicoin Capital has proposed a dynamic inflation model for Solana, similar to that of Fantom (now Sonic Network), with the aim of optimizing staking economics. The initiative comes at a crucial time for the network, which is preparing for the unlocking of $2.400 billion in SOL.
This new governance proposal, driven by one of the network's first investors, seeks to modify SOL's tokenomics, introducing a dynamic inflation model that could reduce both token emissions and staking rewards.
Tadeo Pinakiewicz, Vice President of Research at Galaxy Digital, has noted that Multicoin Capital’s governance proposal has come at a particularly sensitive time, considering the upcoming unlocking of 11,2 million SOL, worth approximately $2.400 billion, from FTX’s assets. This has raised concerns about market pressure and the stability of the cryptocurrency’s price.
The problem of fixed inflation in Solana
Since its launch in February 2021, Solana has operated on a fixed inflation schedule. Initially, the inflation rate was set at 8% per year, with a 15% reduction each year until it stabilizes at 1,5%. Currently, inflation sits at around 5%, a mechanism designed to reward validators and stakers who secure the network, while redistributing value from non-participants to those who stake their cryptocurrencies.
However, this model has been criticized for its rigidity. Galaxy Digital commented that fixed inflation does not respond to changing market conditions or the specific needs of the network and that in a maturing ecosystem like Solana, it is crucial that monetary policy is more adaptable and reflects the economic reality of the network.
What is Multicoin Capital's proposal?
La proposal A report by Multicoin Capital, published on GitHub last Thursday, suggests adopting a dynamic inflation model similar to that used by Fantom, now called Sonic Network. This system would automatically adjust SOL’s inflation rate based on staking participation, with a target of 50%. If the staking rate exceeds this threshold, inflation would decrease to discourage excessive token accumulation. Conversely, if participation falls below the target, inflation would increase to incentivize staking and ensure network security.
“This dynamic approach would allow Solana to better balance incentives between network security and capital efficiency.”, notes JR Reed, partner at Multicoin Capital. "It would also align inflation with the real needs of the ecosystem, rather than following an arbitrary timetable."
The proposal also sets a minimum inflation limit of 0% and a maximum based on Solana’s current issuance curve. Network governance would determine both the target staking rate and a velocity parameter that would control how quickly inflation adjusts.
The implications for SOL validators and stakers
One of the most controversial aspects of the proposal is its impact on staking rewards. Currently, Solana validators and stakers enjoy relatively high returns, above 7% per year. However, with a reduction in inflation, these returns could decrease significantly.
However, the proposal also suggests that validators with a robust infrastructure to capture MEV (maximum extractable value) could offset some of this reduction. “MEV would become a more important source of revenue for validators,” Pinakiewicz added.
FTX SOL Unlock
Multicoin Capital’s governance proposal comes at a critical time for Solana. The upcoming unlocking of 11,2 million SOL, tied to FTX’s equity, has revived concerns about a potential sell-off that could put downward pressure on the token’s price.
Pinakiewicz said Solana is still dealing with the aftermath of the FTX collapse, and the upcoming SOL unlock has revived some concerns related to the turbulent period the network experienced after this. Reducing inflation as proposed could mitigate the impact of this token unlocking; however, not everyone is convinced that this is the right solution.
The proposal has sparked an intense debate within the Solana community, between those who see this initiative as a necessary step towards the maturity of the ecosystem and those who fear that this measure will mainly benefit large token holders, such as cryptocurrency funds, to the detriment of users and developers.
However, it should not be forgotten that the implementation of this proposal will ultimately depend on Solana's governance. If approved, it would mark a milestone in the evolution of the network, setting a precedent for future changes to its tokenomics.
