Why Solana wants less inflation, faster

At the time of writing, Solana appears poised to succeed in her double disinflation proposal (if it is with a small margin) and, fittingly, SOL is up double digits in the last 24 hours amid voting.

Solana will ultimately achieve an inflation rate of 1.5%, an end goal that, at the network’s current pace, would take nearly six years to achieve. If SGP-0002 is adopted, this time frame will be reduced to approximately 2.8 years as the annual disinflation rate doubles from 15% to 30%. The proposal does not modify the 1.5% criterion; it just brings Solana in faster.

Now why are they doing this?

Overall, right now the two major proof-of-stake networks, Solana and Ethereum, are reconsidering whether their systems intended to provide economic security are charging them too much.

Economic security is, broadly speaking, the amount of economic value committed to protecting a proof-of-stake network. The more stakes are controlled by honest validators, the more economic leverage an attacker generally needs to disrupt or compromise consensus. Solana has already staked hundreds of millions of SOL, creating a substantial capital wall against attacks.

Issuing SOL to validators and stakers helps keep this security attractive, but Solana and Ethereum have begun to question whether they should pay as much as they currently do. Paying a lot makes sense when a network is young, because it needs to incentivize people to participate. But now that Solana is much more mature, the question is whether emissions can come down faster without sacrificing significant security.

This isn’t the first time Solana has considered doing this. Last year, SIMD-0228 proposed a dynamic issuance system linked to staking participation. This vote actually saw a huge 74% participationbut only 61.4% of decisive votes supported it, short of the required two-thirds threshold, amid significant debate over its complexity and effects on validators. This new proposal, SGP-0002, is much simpler, only accelerating the speed at which Solana reaches that final 1.5% rather than overhauling the entire system.

The arguments in favor of this solution essentially boil down to three things:

1. Stop paying too much for security. Solana needed (pass) important broadcast to initiate its network of validators. The pro case is that, at its current maturity, additional issues could now buy less protection than before.
2. Increase the “monetary character” of SOL. Reducing inflation makes SOL less dilutive and, in theory, a more attractive asset to hold and use as a store of value, an endgame that many network assets strive to achieve. Stronger monetary credibility could also indirectly support economic security: if SOL retains more value, the monetary value guaranteeing the network may remain strong even with fewer SOL rewards.
3. Boost DeFi. Higher issuance allows for higher staking returns, which may discourage the use of SOL in DeFi. Why take on smart contract or liquidity risk for only a modest premium over staking? Lower staking yields reduce this barrier, potentially pushing more SOL towards DeFi sites that recycle capital through the ecosystem. The authors of the proposal cite it explicitly trade-off between staking and DeFi.

But there are also legitimate arguments against the proposal, points that may sound familiar if you’ve been following the conversation around Ethereum’s EIP-8363.

1. Squeeze the small validators. The reduction in rewards hits smaller validators, who rely on each dollar they receive rewards. Modeling of the proponents suggests that a faster timeline could push more validators into unprofitability sooner.
2. Centralization comes next. The side effect of this compression could be a migration of stakes towards larger providers whose size allows them to resist the squeeze, centralizing all validators and potentially weakening economic security even if the overall amount of SOLs staked remains high.
3. Better money does not mean better prices. Reducing emissions tightens supply, but reducing supply does not inherently create demand. SOL could become less dilutive without becoming materially more valuable, leaving the network with lower staking incentives and few offsetting benefits. Personally, I find this to be the weakest argument considering the second-order effects of strengthening the monetary value of the token, although I suppose we’ll just have to see.

What’s interesting is that SGP-0002 also arrives alongside a sister proposal, SGP-0003, which also he seems ready to pass and would further slow down the growth of SOL supply on the other side. SGP-0002 reduces the number of new SOLs issued; SGP-0003 would increase the amount of SOL burned as the network is used. Specifically, this would replace the burned portion of Solana’s current fixed transaction fees with dynamic fees based on the amount of computation requested by a transaction, with those fees burned entirely. Modeling based on recent grid activity suggests that, at the final proposed rate, daily burns could increase from around 650 SOL today to 7,500 to 9,000 SOL.

Put the two propositions together and the priority is obvious: slow net supply growth, whether by emitting less SOL on the one hand or burning more SOL on the other.

What’s also interesting about these proposals is that they are among the first to go through Solana’s new on-chain governance system, launched in July, integrating delegates more directly into network-level decision-making. Anyone can write a Solana Governance Proposal (SGP), although going live requires a validator with at least 100,000 SOL active stake, and delegators can override their validator’s vote with their own stake.

All in all, we’ll have to see how the rest of the voting plays out.

Even if this passes, nothing will change tomorrow. SGP-0002 is only the governance mandate; SIMD-0550 is the technical specification to actually achieve change and still needs to be accepted, implemented by Solana customers and activated. The authors’ modeling assumes roughly a 4.5 months lag before activation, rather than an immediate change.

Solana therefore does not become a low inflation asset overnight. If SGP-0002 succeeds, it decides that, in addition mature network, he may no longer need to pay as much for the security he needs. Ethereum faces essentially the same question through a much more complicated mechanism. If Solana’s simpler approach works, I wouldn’t be surprised to see this debate spill over elsewhere.

Exciting times, and it’s nice to see our kids (tokens) continue to grow.