Solana upgrades will strengthen network but squeeze validators — VanEck

Solana’s planned protocol upgrades are important for the network’s long-term health but could deal a blow to validators’ earnings, according to asset manager VanEck. 

In March, Solana’s validators will vote on two proposed upgrades — known as Solana Improvement Documents (SIMDs) — to the blockchain protocol designed to ensure rewards for stakers and adjust the inflation rate for the network’s native SOL (SOL) token. 

Both proposals have generated “significant controversy” because they stand to slash validator revenues by as much as 95%, potentially imperiling smaller operators, VanEck digital asset research head Matthew Sigel said in a March 4 X post. 

“While these changes may reduce staking rewards, we believe lowering inflation is a worthy goal that strengthens Solana’s long-term sustainability,” Sigel said. 

Related: Solana’s Jito staking pool exceeds $100M in monthly tips: Kairos Research

Rewarding stakers

The first, SIMD 0123, “would introduce an in-protocol mechanism to distribute Solana’s priority fees to validator stakers,” Sigel said. Traders can pay extra to validators to process transactions more promptly. 

Sigel said priority fees account for 40% of network revenues, but validators are currently not required to share fees with stakers. Validators are required to pass on other forms of revenue, such as voting rewards. 

The proposal, which is up for a vote on March 6, not only boosts staking rewards but “also discourages off-chain trading agreements between traders and validators, reinforcing on-chain execution,” Sigel said. 

Staking involves locking up SOL as collateral with a validator on the Solana blockchain network. Stakers earn SOL payouts from network fees and other rewards but risk “slashing” — or losing SOL collateral — if the validator misbehaves.

Adjusting inflation

The second, SIMD 0228, is the “most impactful proposal under consideration,” according to Sigel. 

It would adjust SOL’s inflation rate to inversely track the percent of token supply staked, potentially “reducing dilution and lowering selling pressure from stakers who treat staking rewards as income,” he said.

As of February, Solana’s inflation rate stands at 4%, down from its initial 8% rate but still well above its terminal inflation target of 1.5%, according to a report by Coin Metrics shared with Cointelegraph. Inflation currently declines at a fixed rate of 15% annually.

The second proposal was drafted primarily by Multicoin Capital’s Vishal Kankani, according to ChainCatcher. Multicoin, a venture capital firm, owns a “significant position” in Jito, Solana’s most popular staking pool, it said in a March report. 

As of December, upward of 93% of Solana validators use Jito’s software to maximize earnings from block-building, according to developer Jito Labs.

The proposals come as asset managers urge regulators to permit SOL exchange-traded funds (ETFs) to list on US exchanges. Issuers are also asking US regulators to permit cryptocurrency staking in ETFs to enhance returns. 

Bloomberg Intelligence sets the odds of SOL ETFs being approved in 2025 at around 70%.

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