Is Solana’s Inflation Too High?

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Sincere thanks to 0xIchigo and Michael of Laine | Stakewiz for reviewing earlier versions of this work and Zantetsu from Shinobi Systems for providing some of the data.

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Actionable Insights

• All SOL tokens originate from one of two sources—the genesis block or protocol inflation, also known as staking rewards. Conversely, transaction fee burn is the only protocol mechanism by which SOL tokens can be removed from the supply.
• Token issuance is described by the inflation schedule's three key parameters: the Initial Inflation Rate (8%), the Disinflation Rate (-15%), and the Long-term Inflation Rate (1.5%). Solana Mainnet-Beta inflation was formally activated in epoch 150 on February 10th, 2021. The current inflation rate is 5.07%
• Proof of Stake inflation decreases the network share of non-stakers relative to stakers, a dilution that effectively transfers wealth from non-stakers to stakers.
• At 65%, Solana’s staking rate is relatively high compared to industry peer networks. The total amount of SOL staked, currently 380 million, has remained relatively stable since epoch 202 in July 2021. Seven-figure amounts of SOL are staked and unstaked in most epochs.
• The key variables in calculating staking yield are the inflation rate and the percentage of SOL staked. Nominal staking yield (NSY) can be described using the formula NSY = Inflation Rate * Validator Uptime * (1 - Validator Commission) * (1 / Percentage of SOL Staked).
• Total fee burns as a percentage of total staking rewards exceeded 1% for the first time on December 14, 2023, and reached a peak of 7.8% in March. Over the most recent 100 epochs, fee burns have averaged 3.2% of total staking rewards. The deflationary pressure of token burns will become negligible after implementing SIMD-96.
• In many jurisdictions worldwide, receiving inflationary rewards in the form of additional tokens is considered a taxable event, which may lead to tax obligation-driven sell pressure. Quantifying this effect is challenging.
• PoS inflation causes long-term, continual downward price pressure that negatively distorts the market’s price signal and hinders fair price comparison.
• Long-tail independent and ecosystem team validators tend to exhibit lower staking reward commission rates and rely less on inflation commissions than other validator cohorts, including exchange and institutionally-focused validators. 
• Since December 2023, alternative validator revenue sources, including MEV commissions and block rewards, have increased significantly. This growth provides a potential pathway toward a future sustainable validator set that depends less on inflation commissions to cover operational expenses. Whether these alternative sources will maintain elevated levels in the long term remains to be seen.

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Introduction

This report addresses the ongoing FUD and misinformation surrounding Solana’s inflation schedule, providing a comprehensive analysis based primarily on data and facts. The analysis is divided into three sections: Past, Present, and Future. 

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• Past: examines Solana's pre-inflation tokenomics, detailing key events such as token sales, unlocks, and early token burns.
• Present: quantitatively assesses the current inflation schedule and disinflationary factors, including transaction fee burns, slashing, user-related losses, and rent. It also discusses the potential impact of the upcoming SIMD-96 protocol update.
• Future: explores the arguments for and against Solana’s current Proof of Stake (PoS) inflation rate and considers potential adjustments to the existing inflation schedule.

Useful Definitions

First, let us formally define a few key terms we will use throughout this report. Readers already familiar with these Solana-specific definitions may skip this short section. 

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Total Current Supply: The total number of SOL tokens currently in existence, locked and unlocked. More formally, the total current supply equals the total tokens generated minus the total tokens burnt. The total current supply is 583 million at the time of writing.

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Circulating Supply: The total number of SOL tokens circulating across exchanges, on-chain protocols, and users’ wallets. This includes both staked and unstaked SOL. Circulating supply is 466 million at the time of writing. More formally, we can say:

 

Circulating Supply = Total Current Supply - Non-Circulating Supply

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Non-Circulating Supply: This comes in two primary forms: SOL tokens locked in stake accounts and SOL kept in unlocked staked accounts owned by Solana Labs or the Solana Foundation. SOL locked in stake accounts are generally the result of a SOL investment or a Solana Foundation grant. Each stake account has an unlock date following vesting arrangements. Secondly, SOL tokens directly under the ownership of Solana Labs or the Solana Foundation. These are kept in unlocked stake accounts. The Foundation uses a large chunk of this (currently 51 million SOL) for its delegation program. The non-circulating supply is 117 million at the time of writing.

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Locked Tokens

Locked tokens are tokens held in stake accounts with conditions preventing their withdrawal before a predetermined date. These lockup parameters are based on a specific UNIX timestamp or epoch and are set by a designated custodian when creating the account. Locked stake accounts can be undelegated, split into smaller accounts, and redelegated to other validators. They cannot be withdrawn or transferred to another address before the lockup period expires. Although any user can create locked stake accounts, this practice is primarily employed by the Solana Foundation to distribute tokens and grants subject to specific performance requirements or time locks.

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Past: Pre-Inflation & Early Tokenomics

On March 16, 2020, 500 million SOL tokens were instantiated in the Solana Mainnet-Beta cluster’s genesis block. During its first year of operation, Solana did not feature inflationary staking rewards. Eight million SOL tokens were sold to non-U.S. buyers on March 24, 2020, through a Dutch auction hosted on CoinList. This auction raised just $1.76 million, with a final clearing price of $0.22 per token. The public auction tokens, plus a small amount distributed as part of a series of airdrop campaigns on Binance, became Solana’s initial circulating supply.

Above: Solana’s genesis block distribution as presented in the original public auction purchaser deck

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During this period, Solana faced significant challenges in raising capital compared to many of its industry peers. For instance, Algorand had successfully raised $60 million through a similar CoinList auction just six months earlier, while Hedera Hashgraph secured $100 million from institutional and high-net-worth individual investors eighteen months prior.

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“Before we launched in 2020, we tried to raise a bigger bridge round, but we couldn’t. We let go of a third of the team just to extend our runway. We launched in March as soon as we could under pressure… We announced our auction, and two days later, on March 16th, 2020, all the markets tanked. The world was on fire. We had six or seven months of runway left.” 

- Anatoly Yakovenko, Solana co-founder (source)

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This lack of capital shaped vital early decisions.

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“That forced me into a particular strategy that ended up being right in retrospect… If we’d had as much as our competitors, I would have been like all our competitors are building EVM support; we must also build EVM support… Turns out the best decision we could have made was to build a runtime that optimized purely for performance.”

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Approximately nine months after the auction, early token holders from the pre-auction private SAFT sales (i.e., Seed, Founding, Strategic, and Validator rounds) had all their tokens unlocked. Founders saw 50% of their tokens unlocked, with the remaining 50% released gradually over the following 24 months. Non-founding employees also unlocked all their tokens (100%) at this time, with undisclosed restrictions on selling (source).

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In May 2020, in response to the early community’s concerns regarding the practice of lending tokens to market makers, the Solana Foundation permanently removed 11.36 million SOL from its portion of the total supply, reducing it to 488.64 million.

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Present: Solana’s Inflation Schedule

Following a community vote, Solana Mainnet-Beta inflation was formally activated on slot 64800004, epoch 150, on February 10th, 2021, with the initial payment of 213,841 SOL. 

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The inflation schedule is a deterministic description of token issuance over time with three key parameters:

• Initial Inflation Rate (8%): The starting inflation rate for when inflation is first enabled
• Disinflation Rate (-15%): The rate at which the inflation rate is reduced per epoch year
• Long-term Inflation Rate (1.5%): The stable, long-term expected inflation rate

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At the time of writing, Solana’s inflation rate is 5.07%. This can be checked using the Solana CLI tool suite with the command 'solana inflation' or the RPC method ‘getInflationRate’. 

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Epoch years consist of 182.5 epochs—the number of epochs that would be in a human year if each epoch lasted precisely two days. An epoch is 432,000 slots, each of which should, at minimum, take 400ms. However, since block times are variable, epochs commonly exceed this two-day lower-bound by a few hours (e.g., recent epoch 661, 2 days 4 hours). In earlier years, Solana’s Mainnet cluster commonly experienced slow three-day epochs (e.g., epoch 322, 3 days 3 hrs), considerably dragging out Solana’s inflation during this period schedule when measured in standard years.

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For example, I am writing this on August 30th, 2024, and the current Solana epoch is 663. This is 513 epochs since inflation was activated on February 10th, 2021, epoch 150, which is 2.81 epoch years but 3.55 standard years.

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The following chart models the total current supply based on this inflation schedule from an initial 488.6 million SOL (500 million minus 11.3 million burn) in February 2021.

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The original community forum discussions of how these exact parameters were chosen are no longer available. However, an interview with Solana co-founder Anatoly Yakovenko at the time reveals some indications.

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“I don’t expect them [the inflation parameters] to be much different from what Cosmos has simply because our set of validators has a lot of overlap with that network, almost the exact same folks. And also, it [Cosmos’ inflation schedule] seems to work so we don’t need to experiment. When things are working in other networks we’ll definitely borrow those ideas.”

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Additionally, an early brief outline of staking rewards in the Solana GitHub repository acknowledges Casper FFG’s influence.

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Inflation Distribution Mechanism

Delegated Proof of Stake (DPOS) consensus is natively built into  Solana. Staking interfaces are accessible directly through wallets, ecosystem dApps, and various comparison platforms. Token holders can easily stake SOL to a validator of their choice and unstake at every epoch boundary. Additionally, they can delegate to stake pools or purchase liquid staking tokens, which amounts to staking. Delegating tokens to a validator denotes trust in the validator. However, it does not give the validator ownership or control over the tokens.

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Staking rewards are first divided based on credits earned for the epoch. For each block a validator votes on, which is later finalized and becomes canonical, the validator will earn a single credit. A validator's share of the total credits (i.e., their credits divided by the sum of all validators' credits) determines their proportionate reward. This is further weighted by stake. A validator with 1% of the total stake should earn roughly 1% of the total inflation if they have an average number of credits. Rewards will fluctuate accordingly if they exceed the average number of credits. Vote credits are a quantitative measure of an individual validator's participation and correctness in the consensus process. A validator being offline (i.e., delinquent) or out of sync with the chain will significantly impact rewards. Inflation rewards are calculated and distributed to delegators’ stake accounts at the epoch boundary. Doing so for over one million stake accounts is resource-intensive, slowing the network and leading to frequent epoch boundary consensus forks.

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Validators charge a commission for their services as a percentage of the delegator's inflation rewards. This commission is usually a single-digit percent but can technically be any number from 0% to 100% inclusive. There are over 200 private Solana validators whose stake is presumably wholly owned by the operating entity and delegated to themselves. These entirely self-staked SOL validators can be identified by their 100% commission rate.

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The following formula describes the nominal returns from staking inflation rewards:

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Nominal Staking Yield = Inflation Rate * Validator Uptime * (1 - Validator Commission) * (1 / Percentage of SOL Staked)

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The percentage of SOL staked is defined as:

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Percentage of SOL Staked = Total SOL Staked / Total Current Supply

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Staking yield varies each epoch as the inflation rate, the validator's performance, and the total active stake change continually.

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Check out our Helius staking blog post to fully explore Solana's staking mechanisms.

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Modeling Proof of Stake Inflation

“The biggest criticism is that Solana inflation is too high, and somehow, that’s a cost to the network. Mathematically, if you look at the network, Inflation is moving value between unstaked users and staked users. And that is a cost to unstaked users… So you can say it's a cost to those specific users but it’s a gain to the other users. And kind of the open market evens that out.” - Anatoly Yakovenko, Lightspeed podcast (source)

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Overall, Proof of Stake inflation decreases the network share of non-stakers relative to stakers, a dilution that effectively transfers wealth from non-stakers to stakers. This phenomenon can be demonstrated using a simplified model with the following parameters:

• 10,000 total token supply
• $1 million market capitalization
• 5% annual inflation rewards 
• Six users each start with an equal number of tokens
• 66% staking rate (four staking users, two non-staking)

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Initially, all users hold 1,667 SOL tokens, representing 16.7% network ownership, valued at $166,666. Over one year, 500 new tokens will be distributed to stakers as inflation rewards. By the end of this year, each of the four stakers will have 1,792 SOL tokens, a nominal increase of 125 tokens (7.5%), increasing their network ownership share by 0.4% to 17.1%. Meanwhile, the two non-stakers, whose token amounts remain nominally unchanged, experience a decrease in network ownership by 0.8% to 15.9%. Assuming the network’s total market value remains constant at $1 million, each SOL token will have fallen in value from $100 to $95.23. However, each staker will experience their share of the network rise in overall value by $3,968 (a 2.4% increase). Correspondingly, each non-staker loses $7,936 in value (a 4.8% decrease).

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This model illustrates that PoS staking not only prevents dilution but actually enhances ownership over time. Furthermore, this simplified scenario accurately reflects Solana’s current inflation rewards situation. With Solana's current inflation rate at 5.07% and a total supply of 583 million SOL, of which 378 million SOL are staked (representing a 65% staking rate), users can anticipate a somewhat similar annual value transfer due to inflation rewards, with stakers gaining around 2.4% and non-stakers losing approximately 4.8% of their network ownership. This simplified model indicates that stakers should receive a 7.5% annual return in nominal terms for SOL staking, which roughly aligns with current rates. Of course, there is more nuance to the actual situation that we will discuss shortly.

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Note the percentage gain or loss in network ownership is the same regardless of the user's absolute number of tokens. The two key variables are the inflation rate and the percentage of SOL staked.

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Solana’s staking rate is relatively high compared with industry peer networks, which can be attributed partly to the simplicity and user-friendliness of the staking process. Yet the amount of SOL staked has remained relatively stable since epoch 202 in July 2021 reached 370 million SOL (see chart above) despite staking rewards inflating the overall total supply. This means Solana’s percentage of staked SOL is slowly decreasing over time, a dynamic favorable for stakers.

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Despite the overall stability in the total amount of SOL staked, there is still significant fluctuation, with seven-figure amounts of SOL being staked and unstaked in most epochs. This volatility is primarily driven by movements within stake pools. 

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As mentioned earlier, the percentage of SOL staked is currently 65%, with inflation at 5.07%. Assuming a constant two-thirds staking rate, we can chart inflation staking rewards, nominal and inflation-adjusted by the inflation rate.

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Disinflationary Forces

Our analysis will now shift to Solana’s disinflationary forces, of which we identify three types: transaction fee burns, slashing, and user-related losses. We’ll also consider the effects of Solana’s rent mechanism on inflation. This section introduces the term “net inflation,” defined as:

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Net inflation = Total inflation - Total disinflation
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Transaction Fee Burns

All charts and values presented in this section are based on a dataset kindly provided by Zan of Shinobi Systems. A spreadsheet of the raw values can be accessed (here). We encourage readers to conduct their own analysis.

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Transaction fee burns are the only protocol mechanism that directly removes SOL and lowers the total supply. Previously, fee burns comprised 50% of the base fees and 50% of the priority fees for all transactions within a block. Base fees, also known as signature fees, are fixed at 5,000 lamports per signature irrespective of the transaction’s complexity—usually, there is one signature per transaction. Prioritization fees are technically optional but have become increasingly standard practice. These fees are priced in micro-lamports (millionth of a lamport) per compute unit. 

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prioritization fee = compute unit price (micro-lamports) x compute unit limit

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This structure will shift with the passing of SIMD-96, which should be implemented shortly after Breakpoint Conference 2024, with Agave 2.0 per the current release schedule. Moving forward, 100% of the priority fees will go to block producers, removing their incentive to engage in out-of-protocol side deals.

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A clear inflection point for priority fees can be observed starting from Epoch 544 on December 10th, 2023. The highest total fee burn was 13,212.31 SOL for epoch 590, beginning on March 18th, 2024. Over the most recent 100 epochs of data, total fee burns have averaged 5,372.16 SOL per epoch.

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Total fee burns as a percentage of total staking rewards exceeded 1% for the first time in epoch 546, beginning on December 14, 2023, and reached a peak of 7.8% in epoch 590, starting on March 18, 2024. Over the most recent 100 epochs, fee burns have averaged 3.2% of total staking rewards. However, if we apply the post-SIMD-96 rule changes (removing priority fee burns) to simulate fee burns, total burns would never have surpassed even 1% of total rewards at any point throughout Solana's history. If implemented over the most recent 100 epochs of data, SIMD-96’s changes would have led to a 2.81% increase in the overall issuance (e.g., an epoch with 5% net inflation would rise to 5.14%). Validator community members have previously estimated this increase in overall issuance to be slightly higher at 4.6%.

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An analysis of net inflation per epoch, defined as total staking rewards minus total fee burns, reveals that new SOL token issuance significantly outweighs the impact of protocol token burns. Furthermore, with the implementation of SIMD-96, the already limited influence of token burns will be reduced even further, becoming negligible.

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The comment below from the Solana forums SIMD-96 discussion summarizes the effect of SIMD-96 with regard to inflation:

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“This SIMD will make it much harder for transaction fees to add significant deflationary pressure. Right now, transaction fee burn might be dwarfed by inflation emissions, but it’s still possible that fee burn can have a greater impact in the future – this SIMD makes it far harder for them to be significant in this regard though. Whether deflationary pressure matters is up for debate.” - 7LayerMagik, Overclock Validator

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A final point worth noting about SIMD96 is that unlike the inflation schedule—which was formally voted on by the community—the initial decision to enact 50% burn of priority fees did not undergo a formal governance or consensus process.

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User-related Losses

User-related losses is an umbrella term capturing the many unfortunate ways SOL could be permanently lost through user error, security incidents, program bugs, or lost private keys. For example, it has been previously estimated that 0.76% of Ethereum’s total supply (912,296.82 ETH), worth $2.3B at the time of writing, has been lost forever due to such incidents. Over half of this amount can be attributed to a single 2017 security incident, leading to over half a million ETH being frozen.

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Bitcoin is another notable example for which we have data. Roughly 1.75 million Bitcoin wallets have been inactive for a decade or more, collectively holding 1,798,681 BTC, valued at $106.3 billion at the time of writing. This figure excludes around 30,000 wallets believed to be associated with Bitcoin's creator, Satoshi Nakamoto. These long-dormant coins represent 8.3% of Bitcoin's total fixed supply of 21 million. While it's impossible to know for certain, many of these coins will likely be lost forever, given the numerous high-profile cases of individuals being locked out of their Bitcoin holdings due to lost or forgotten keys.

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As activity on the Solana network grows, user-related losses will inevitably occur. Safely storing private keys long-term is challenging; even professional wallet providers make errors. Additionally, token holders may pass away without transferring their keys.

Slashing

Solana has not yet implemented programmatic slashing despite such mechanisms being considered in the early protocol economic designs. Official documentation outlines a process for manual socially enforced slashing, which has been tested on Testnet:

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“...after a safety violation, the network will halt. We can analyze the data and figure out who was responsible and propose that the stake should be slashed after restart.”

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Our analysis includes slashing for completeness as one of the established ways that Proof of Stake networks can reduce token supply. However, given its infrequent occurrence, slashing is unlikely to significantly impact the overall inflation rate. Furthermore, some initial proposals for automated slashing suggest freezing staked tokens for several epochs, preventing them from earning rewards rather than reducing the principal. As a result, these methods may not reduce the token supply.

Rent

While not a true disinflationary force, rent is worthy of discussion within this context. All Solana accounts must hold a minimum "rent-exempt" balance of SOL, a storage cost that keeps the account alive in a validator's memory. This minimum balance requirement is proportionate to the data stored and fully refundable upon closing the account. Solana’s rent rate is set network-wide based on the runtime constant lamports per byte per year. For example, the rent-exempt amount for a standard user token account (associated token account) is 0.002 SOL. This mechanism reduces state bloat and incentivizes the closing of unused accounts.

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Many programs automatically manage rent reclaims for users, and several applications exist designed to help users reclaim rent from unused accounts. Despite these tools, anecdotally, many Solana users remain unaware of how rent works. Additionally, some applications fail to provide users with a straightforward way to reclaim rent.

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Each rent payment represents a temporary lockup of SOL, which, if unreclaimed, constitutes a user-related loss. While these amounts are minuscule individually, they can add up to a substantial total when considering all applications and users. Moving forward, ZK compression could partially mitigate these high account costs.

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Future: Time for change?

“It’s just numbers moving around the black box… It’s [the inflation schedule] probably too high right now. It could actually be ten times lower, and everything would be fine. I don’t think the costs matter that much at the end of the day.”
- Anatoly Yakovenko (source)

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In this final main section, we will first briefly quantify the remaining non-circulating supply unlocks schedule. Then, we will examine the arguments for altering Solana’s issuance, including the concept of “issuance as a network cost,” the tax inefficiencies that inflation introduces, inflation’s downward price pressure, penalizing network use, and the rise of alternative validator income sources. After this, we will explore some practical ways to alter the inflation schedule and reduce inflation.

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Future Non-circulating Supply Unlocks

Over the past three years, Solana’s locked stake has had a relatively steady rate of unlocks, from a peak of 96 million SOL in September 2021 to 48 million SOL in September 2024, representing an overall 50% decline in locked stake.

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At least 43.5 million SOL tokens remain in locked stake accounts, representing 7.5% of the current supply. These include 41 million SOL tokens sold to large industry entities such as Galaxy Digital and Pantera during the FTX’s estate bankruptcy proceedings earlier this year. Some firms, such as Neptune Digital Assets, publicly announced details of their purchases—Neptune acquired 26,964 SOL at $64 per token. Twenty percent of these tokens will unlock in March 2025, with the remainder unlocking linearly every month until early 2028. This unlock schedule is consistent with the on-chain locked stake account data (see chart).

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Below, we present several arguments for adjusting Solana’s issuance.

Issuance as a Network Cost

A popular argument against PoS inflation is that it is an explicit cost to the network and that issuance forms part of a blockchain’s “profitability,” following the formula: profit = burn - issuance. Such arguments are false. Inflation cannot be thought of in such terms. It is only a redistribution of wealth from all token holders to stakers, and all holders have equal rights to receive this cash flow.

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The only network cost relevant to inflation is a portion of the flow of value from stakers to validators, which is then used to pay operational expenses as outlined in the diagram below.

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We could begin to quantify this flow by looking at the total staking reward commissions paid out to validators, currently 44 thousand SOL per epoch. However, this data is heavily inflated by the presence of private self-staked validators with 100% commission rates.

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Tax Inefficiencies

In many jurisdictions worldwide, receiving inflationary rewards in the form of additional tokens is considered a taxable event, similar to receiving stock dividends. It is generally taxed as income upon receipt. This creates potential ongoing sell pressure as stakers are required to sell tokens to meet their tax obligations annually. Quantifying this effect is challenging due to the multitude of global tax jurisdictions, often with complex and convoluted tax laws. Even within a single jurisdiction, individual tax liabilities can vary significantly. Additionally, the permissionless nature of staking makes it impossible to track ownership back to individuals.

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Rebasing Liquid Staking Tokens (LSTs) may help reduce this tax burden, as suggested in a Jito blog post:

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“non-rebasing LSTs, such as those on Solana, may allow users to capture rewards without incurring taxable events, since the quantity of LST tokens in the wallet does not change (please consult a financial professional for advice specific to your situation).”

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However, swapping between SOL and staked SOL itself may also constitute a taxable event. Furthermore, as we explored in our previous SFDP report, the overall adoption of LSTs on Solana is relatively low. 94% of all staked SOL is natively staked, with just 6% of SOL (24.2 million SOL) utilizing liquid staking, up from 17 million SOL at the beginning of 2024 and 12.4 million SOL a year ago (95% annual growth).

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Downward Price Pressure

Inflation causes long-term, continual downward price pressure that negatively distorts the market’s price signal and hinders fair price comparison. To use an analogy from traditional financial markets, PoS inflation is equivalent to a publicly listed company doing a small share split every two days. Charts, dashboards, casual observers, and marginal retail buyers primarily do not account for inflation in their analysis.

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A favorable price chart is an ecosystem's best advertisement; this is true not just for traders but for all ecosystem participants. In crypto’s psychologically driven markets, price is a Schelling point and signal of health for an ecosystem. Strong price is always the best form of marketing—price drives narrative.

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Consider two alternate scenarios. I currently hold 100 SOL tokens, each worth $100, for a total of $10,000. 

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Scenario A: I stake this SOL and wait one year. The price dropped 5% during this time, but as a staker, I was rewarded with 12% issuance. I now have 112 SOL at $95 per token. My holdings are worth $10,650.

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Scenario B: I chose not to stake. The price of SOL went up 5% over one year. I now have 100 tokens at $105 per token, making my holdings worth $10,500.

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In absolute terms, scenario A leaves me slightly better off. However, scenario B will feel more satisfying due to the price increase, even though this perception is irrational. The psychological impact of price can be overlooked or downplayed, as these factors are inherently difficult to quantify. People tend to favor decisions or policies based on quantitative data, even when qualitative factors may be equally or more significant.

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Penalizing Network Use

PoS inflation penalizes the active on-chain use of SOL for activities such as participating in liquidity pools, NFT trading, or placing order book bids—the opposite of what we would expect a network aiming for growth to incentivize. While Solana’s mature and robust Liquid Staking Token (LST) infrastructure may help mitigate some of these adverse effects by allowing SOL to be used actively without dilution, it also introduces additional costs. These include user experience friction, liquidity fragmentation across different tokens, potential slippage when swapping in and out of LSTs, and the burden on users to understand staking mechanics to protect themselves from the indirect cost of dilution.

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Respected industry commentators have previously argued that the majority of a native token should be actively productive, with an ideal staking rate closer to 10%.

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Counterbalance High State Costs

Inflation's downward pressure on price may help alleviate Solana's high state storage costs. These costs were initially set when the price of SOL was significantly lower than today. A frequent complaint among Solana’s developer community is the high expense of deploying programs on-chain, which can often run into hundreds or even thousands of dollars worth of SOL.

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Viable Alternative Sources of Validator Income

As discussed in our previous SFDP report, validators have three primary sources of revenue: MEV commission, block rewards, and commission on staking rewards.

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Since December 2023, MEV commissions and block rewards have increased significantly. Earlier in the fee burn section of this report, we covered data on priority fees. The following chart illustrates the increase in MEV.

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The ratio of these three sources of revenue will vary between validators depending on factors such as the validator’s overall stake amount, commission levels, the proportion of self-delegated stake, commissions paid to stake pools or programs such as Marinade Finance’s Stake Auction Marketplace, and overall performance metrics such as delinquency rates and vote lag.

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However, it is easy to identify validator cohorts that benefit most from higher inflation; these include highly staked exchange validators serving off-chain retail users and some institutionally focused validators. Such validators often have relatively higher commission rates, as seen in the case of exchanges with Coinbase (8%), Binance Staking (8%), Kraken (100%), and Upbit (100%). Institutional examples include Everstake (7%), Twinstake (10%), Hashkey (7%) and P2P (7%).

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On the other hand, cohorts such as ecosystem teams (e.g., Jupiter 0%, Solflare 6%, Mrgn 0%, Helius 0%) and independent validators (e.g., Melea 0%, StakeHaus 0%, Shinobi Systems 3%, Laine 5%, Solana Compass 5%) generally exhibit lower commission rates and benefit less from inflation commissions. This is because these validators, particularly long-tail independent validators, must compete for market share by targeting the actively managed on-chain stake responsive to APY rates. These are the most price-sensitive stakers seeking the highest returns.

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In summary, alternative revenue sources beyond inflation commissions grew substantially in 2024. Whether these alternative sources will maintain such elevated levels in the long term remains to be seen. Meanwhile, the validator cohorts benefiting the most from inflation rewards are exchange and institutional validators charging higher commission rates. These cohorts are disproportionately represented in the superminority and supermajority.

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This section used Solana Beach as the data source for staking commissions. For a further exploration of validator cohorts, please refer to our previous SFDP report.

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Staking Incentive

“Rationally, you need some stakers to pick the quorum. The quorum can’t cause a safety violation that can halt the network, but in a well-managed run system, the quorum cannot really do anything. You need some incentives to stake for people to pick the quorum. And you need some stick, slashing, for people to do a good job when they pick the quorum, and that’s it.”
- Anatoly Yakovenko (source) 

Inflationary rewards encourage users to stake their tokens, thereby enhancing the network's security. Although Solana's current staking rate is relatively high at 65%, a significant reduction in inflation rewards could shift the equilibrium stake level, potentially leading to unintended consequences such as lower participation in governance.

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Modelling Inflation Schedule Modifications

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“One of my big rules has always been, “double it, or cut it in half.” Don’t waste your time adjusting something by 5 percent, then another 5 percent, then another…  just double it, and see if it even had the effect you thought it was going to have at all.” - Sid Meier, creator of Civilization. Source: Sid Meier's Memoir

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In this section, we explore several hypothetical scenarios for altering Solana's inflation rate by adjusting the three key parameters of its inflation schedule. This analysis aims to provide a clearer understanding of each parameter's impact on the overall inflation rate.

• Initial Inflation Rate (8%)
• Disinflation Rate (-15%)
• Long-term Inflation Rate (1.5%)

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Data for these projections can be found in this spreadsheet.

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We will explore the following scenarios.

• Scenario A: Double the disinflation rate from -15% to -30%‍
• Scenario B: Halve the long-term inflation rate from 1.5% to 0.75%‍
• Scenario C: Halve the current inflation rate with immediate effect from 5% to 2.5%‍
• Scenario D: Halve current inflation rate, double disinflation rate, and halve terminal rate

We approximate the current inflation rate to be 5% starting in September 2024 with a total supply of 584 million SOL and model the effects forward for eight years. As shown previously, Solana’s token burn mechanisms post SIMD-96 will have a negligible impact on supply; they will be ignored in this analysis. For simplification, inflation is calculated yearly, and epoch years are treated as equivalent to standard years. A baseline of the current unchanged inflation schedule is also provided.

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Halving the long-term inflation rate (Scenario B) has virtually no effect on inflation over the next eight years. This change would lower the total supply by just 1 million by September 2032. Doubling the disinflation rate (Scenario A) would result in a total supply of 678 million after eight years, 5.3% lower than the baseline. Halving the current inflation rate (Scenario C) would result in a total supply of 664 million after eight years, 7.3% lower than the baseline. Finally (Scenario D), halving the current inflation rate, doubling the disinflation rate, and halving the terminal rate result in a total supply of 629 million after eight years, 12.2% lower than the baseline. 

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Based on these increases in supply, we can model their expected impact on the SOL token price by holding all other variables constant (i.e., ceteris paribus), in particular Solana's fully diluted valuation (token price * total current supply). For illustration purposes, we pick a starting price of $150 per SOL token.

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In our baseline scenario, the current inflation schedule's downward price pressure from inflation rewards leads to a price fall of 18.5% over eight years, reducing the token price to $122.25. By doubling the disinflation rate (Scenario A), the token price is reduced by 13.93% over eight years to $129.10. Halving the current inflation rate with immediate effect (Scenario C) reduces the price by 12.07% to $131.90. Finally (Scenario D), halving the current inflation rate, doubling the disinflation rate, and halving the terminal rate reduce the price by just 7.26% over eight years to $139.10. 

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An area for further research would be to examine the impact of such changes on the inflation commissions collected by long-tail independent validators' operations and the overall impact on the incentive for users to continue staking.

Conclusion

This article explored Solana’s inflation schedule and issuance from past, present, and future perspectives. We analyzed the current mechanisms for calculating and distributing inflation and identified the counterforces that reduce inflation. We also assessed the potential impact of SIMD-96, discussed key arguments for adjusting the inflation rate, and concluded by modeling hypothetical changes to the inflation schedule parameters.

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Solana’s issuance has faced a great deal of ill-informed scrutiny, and we hope this report provides clarity on several key points. With this understanding, we aim to foster more informed discussions and contribute to more constructive dialogue on this topic that can affect positive change.