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VanEck: Upcoming Solana Protocol Upgrades Aim to Enhance Network Health, Risk-Reducing Validator Earnings
- Solana plans two protocol upgrades to adjust priority fee distribution and the SOL inflation rate, with votes scheduled for March.
- The changes aim to boost staking rewards and discourage off-chain trading, but may cut validator earnings by up to 95%, potentially impacting smaller validators.
- These proposals come as Solana faces institutional interest amid ETF filings.
Solana (SOL) is getting ready for two major protocol upgrades, known as Solana Improvement Documents (SIMDs), in a bid to strengthen the network’s long-term sustainability.
This month, Solana validators will vote on two proposals, SIMDs 0123 and SIMDs 0228. These will adjust how rewards and inflation are managed, respectively, for the network’s native SOL token.
But according to Matthew Sigel, head of digital asset research at VanEck, these changes could reduce validator revenues by as much as 95%.
Related: SEC Ends ‘Wasteful, Politically Motivated Campaign’, Drops Kraken Lawsuit
Controversial Proposals
The first proposal would implement an in-protocol mechanism to distribute priority fees, currently accounting for roughly 40% of network revenues, to validator stakers. This proposal is scheduled for a vote in March.
Traders pay extra to expedite transactions, and while validators already pass on other forms of revenue (such as voting rewards), this change would require them to share priority fees as well. The idea here is to boost staking rewards while discouraging off-chain trading agreements between traders and validators, hence reinforcing on-chain execution.
That’s the first point Siegel highlights:
If SIMD 0123 passes, validators would be required to distribute these fees to stakers based on an on-chain verifiable commission rate, shifting more revenue to stakers while reducing validator earnings.
Matthew Sigel, head of digital asset research at VanEck The second proposal seeks to adjust SOL’s inflation rate to inversely track the proportion of the token supply that is staked. By doing so, the mechanism is expected to reduce dilution and lower selling pressure from stakers who treat rewards as immediate income.
Moreover, Sigel said:
Some estimates suggest validator earnings could decrease by as much as 95%, making operations unsustainable for smaller validators. […] Some community members propose reducing the cost of voting as a potential solution to help validators remain financially viable. However, determining the optimal number of validators to sustain a decentralized network is complex, and such decisions are ultimately left to market dynamics.
Matthew Sigel, head of digital asset research at VanEck Let’s keep in mind that Solana’s inflation rate today is 4%, down from an initial 8%, but it remains above its long-term target of 1.5%. Meanwhile, Inflation declines at a fixed rate of 15% annually, and the proposed adjustment is considered the most impactful change pending vote.
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So, where does all of this come from? The proposals emerge amid rampant interest from institutions seeking approvals for Solana exchange-traded funds (ETFs) in the US.
As Crypto News Australia reported, the Securities and Exchange Commission (SEC) has until October this year to decide on multiple Solana filings.
Related: Crypto ETPs with Weakened Sentiment as 4$ Billion Leave Funds
Author
José Oramas
José is a journalist and translator with a keen interest in blockchain and cryptocurrencies.
