Solana is touting a major upgrade to its network, which will significantly impact validator economics. Still, this upgrade raises concerns, especially about network fees. Specifically, holders are concerned the upgrade will make Solana significantly more inflationary, creating significant pressure on its price.
On Wednesday, February 12, upgrade SIMD-96 went live on Solana, introducing a new system of staking rewards. The new system will give validators all transaction fees, improving their incentives. The upgrade also focuses on liquid staking.
The upgrade also enables every validator to create their own Liquid Staking Token (LST). This system allows SOL holders to stake their tokens, earning rewards. At the same time, the LST tokens enable users to retain liquidity from their tokens. Solana founder Anatoly Yakovenko suggested that the new system is a great opportunity for validators in liquid staking.
Despite these changes, some users have raised concerns over the potential effects of the upgrade. Most notably, users are concerned that SOL will become more inflationary.
Will Solana Become More Inflationary?
Previously, validators received 50% of all fees for transactions on the network. The other 50% went toward token burns, reducing SOL’s supply. Token burns had a deflationary effect, helping boost Solana’s price.
Critically, without 50% of the fees going to burns, Solana will lose a key deflationary mechanism. At the same time, staking rewards create continued inflation for the network. For instance, one critic pointed out that Solana can expect as much as $1 million in daily inflation if the new proposal takes place. This will put significant pressure on the price, negatively affecting holders.
This issue with the SIMD-96 proposal was raised previously by SOL holders. Other than making SOL more inflationary, one user pointed out another potential issue. For instance, validators would have an incentive to collude and create a high volume of fake and bot transactions. These transactions would force users to opt for priority fees, which give more revenue to the validators.
While users have concerns, Solana is already looking at potential solutions to this problem. Notably, Multcioin Capital, an early investor in Solana, proposed implementing a dynamic inflation model. This model would likely cut the inflation rate significantly.
READ MORE: Solana ETF Race Heats Up With Franklin Templeton Filing
