Solana's Inflation Surges 30.5% After Fee Model Shift

Solana's (SOL) annualized inflation surged by 30.5% following the implementation of a new priority fee distribution model on February 12. The daily SOL burn rate plummeted from nearly 18,000 SOL to just 1,000 SOL.

The Solana Improvement Document 96 (SIMD 96) proposed a shift in the fee distribution model, using total priority fees for network validators instead of half, to burn SOL. This change led to a significant increase in SOL's annualized inflation, from 3.6% to 4.7%. Additionally, the SOL weekly burn rate dropped to 6.93% between February 10 and 16, the lowest level since mid-October 2024 and nearly half the previous week's ratio.

The SIMD 96 also impacted the real economic value (REV) distributed to token holders. According to on-chain data, token holders received 65.7% of Solana's REV from February 3 to 9, which decreased to 58.9% from February 10 to 16. Meanwhile, the REV percentage distributed to validators grew roughly the same in the period.

Looking at the daily timeframe, the token holder REV percentage reached almost 72% and gradually fell until it reached 40.9% on February 16. In the same period, the validator commission slowly grew from 25.1% to 56.1%.

The SIMD 96, approved in May 2024, aimed to boost validator incentives and discourage side deals. However, one practical impact was raising the annualized inflation of SOL. Solana enthusiasts are now awaiting the approval of SIMD 228, which will reform SOL's inflation mechanism to a dynamic ratio based on the amount of staked SOL.

Introduced by Tushar Jain and Vishal Kankani of Multicoin Capital, SIMD 228 aims to boost SOL's inflation if the amount staked falls below 50% of the supply. Conversely, if the amount surpasses 50%, the inflation rate is reduced accordingly. This would help mitigate inflation growth brought by SIMD 96 despite not directly addressing the falling REV distribution to token holders.