Lightspeed Newsletter Update

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The Solana community is abuzz over SIMD-0228, a proposal aimed at altering Solana’s inflation mechanism. There are debates about whether this proposal could undermine Solana’s decentralization or face sabotage from within.

Despite initial assumptions, voting is still expected to commence during Solana epoch 753 at approximately 8:30 PM ET.

In this week’s Lightspeed podcast roundup, Helius CEO Mert Mumtaz, Blockworks Research data lead Dan Smith, and I discussed the proposal in detail. Proponents of SIMD-0228 argue that Solana is overpaying for security and advocate for market-based mechanisms. Conversely, critics warn that reducing issuance rewards could centralize power within the network.

While network centralization is indeed a concern—evidenced by MEV tips leading to increased REV, enabling entities like Jito to gain more influence—it’s crucial that Solana retains the pragmatic spirit that fueled its rise. There is a possibility that issuance is excessively high, and validator revenue ought to stem from tangible value creation via MEV and priority fees. Based on my analysis, I believe SIMD-0228 should likely pass.

Further insights will be provided next week, but I find the discussion around SIMD-0096 even more compelling. This change, which halted the burning of half of Solana’s priority fees—implemented in February—means that 100% of these fees now benefit validators. As a result, Solana’s inflation rate has seen an uptick, rising from 3.7% to 4.6% on an annualized basis, as noted by Blockworks Research analyst Carlos Gonzalez Campo in this week’s podcast episode.

This inflation increase was anticipated; however, the response to SIMD-0096 has produced unexpected results. Campo pointed out that if users and validators acted rationally, users should have started paying lower priority fees given the removal of what was essentially a 50% tax on fee revenue. Surprisingly, priority fees have remained steady, indicating that user competition may not be driving fees down.

Moreover, validator revenue from priority fees fell proportionately after the implementation of SIMD-0096. Users increasingly opted for MEV tips, and validators struggled to persuade them to revert to priority fees. While it’s premature to draw definitive conclusions from these trends, they are noteworthy.

Campo provided an interesting benchmark for judging the success of SIMD-0096: a decrease in the number of Transaction Processing Units (TPUs) on Solana. TPUs are external services for transaction inclusion, and their increasing number complicates development and raises overhead costs. SIMD-0096, initially proposed to curb side deals, could inadvertently help limit the influx of new TPUs to the network.