Multicoin Capital was one of Solana’s early investors. Now it’s trying to change the network’s inflation mechanism.
The Austin, Texas-based firm published a Solana Improvement Document this morning that would change SOL emissions from the current fixed schedule to a market-based solution. Multicoin’s proposal would likely drive down inflation — which dilutes SOL holders — but would also lower staking yields, which are a boon for SOL stakers.
In Solana terms, inflation refers to the network issuing SOL to the validators who run Solana’s software and help build the blockchain. Validators then pass this issuance along with some MEV rewards to the stakers who delegate staked SOL to them.
In brief, Multicoin’s proposal sets a target staking rate of 50% for security and decentralization purposes. If more than 50% of SOL is staked, then issuance would decrease to discourage staking by reducing yield. If less than 50% of SOL is staked, then issuance would increase to raise yields and encourage staking. The minimum inflation would be 0%, and the maximum would be based on the current Solana issuance curve.
Solana’s inflation rate was initially set at 8%, and this figure will decrease by 15% yearly until it reaches 1.5% inflation. SOL’s inflation rate is currently around 4.8%, according to Solana Compass. Solana co-founder Anatoly Yakovenko said on the Lightspeed podcast that the fixed rate idea was borrowed from the Cosmos blockchain, and inflation is just “accounting.”
Yakovenko doesn’t care much about inflation, because the process of SOL issuance doesn’t create or destroy value, it simply moves value around. Newly-minted SOL gets passed along to stakers, while non-stakers see their holdings become relatively less valuable.
Still, Multicoin sees a reduction in SOL inflation as necessary for a few reasons. New SOL being passed only to stakers centralizes the network, high inflation reduces the usefulness of SOL for things like DeFi since there’s a high opportunity cost to not stake, and only 9% of staked SOL is liquid. Lower staking rewards could also reduce sell pressure in jurisdictions where staking rewards are counted as income for tax purposes.
Even though issuance doesn’t technically induce a cost to the network as a whole, the negative perception created by unstaked SOL being diluted makes it worth limiting inflation in Multicoin’s view.
There’s some positive precedent here: Ethereum had narrative success defining ETH as ultrasound money after becoming a proof-of-stake network and greatly diminishing its issuance. But there’s also negative precedent in a different way: Cosmos adopted a market-based inflation mechanism for ATOM, but its community has quibbled over where the bounds should be — and ATOM’s price is still down 34% over the past year.
In any event, Multicoin partner JR Reed told me the proposal was inspired by perpetual swaps and their use of funding rates, not Ethereum’s mechanism for limiting inflation.
There’s one other obvious consequence of Multicoin’s proposal: SOL staking yield, which has historically stayed higher than 7%, would decrease if issuance decreased. A growth in MEV rewards could offset the lower inflation, but otherwise, staking SOL would begin to pay fewer dividends.
