Multicoin Capital is one of Solana’s early investors. Multicoin Capital is now trying to alter the inflation mechanism of the network.
This morning, the Austin-based company published a Solana Improvement Document that will change SOL emission schedules from a fixed to market-based. 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, inflation is the process by which the network issues SOL to validators that run Solana’s software and build the blockchain. Validators will then distribute this SOL issuance, along with some MEV reward to stakers.
Multicoin proposes a stake rate target of 50% to ensure security and centralization. Staking would be discouraged by reducing the yield of SOL if over 50% was staked. SOL issuance will increase if less than half of SOL has been staked to encourage staking and raise yields. Minimum inflation is 0% and maximum inflation based on current Solana curve.
Solana’s initial inflation rate is 8%. This figure will decline by 15% annually until it reaches a 1.5% inflation. According to Solana Compass, SOL’s current inflation rate is around 4.8%. Anatoly Yakovenko, Solana’s co-founder and Lightspeed Podcast host, said that the fixed-rate idea came from Cosmos Blockchain. Inflation is only 4.8%. “accounting.”
Yakovenko does not care about inflation. The process of SOL issuing doesn’t destroy or create value; it just moves the value. SOLs are passed on to holders, and non-holders see the value of their SOLs decrease.
Multicoin believes that SOL inflation should be reduced for various reasons. Staking rewards are only passed to those who stake. This centralizes the SOL network. High inflation also reduces SOL’s usefulness for DeFi, since it has a large opportunity cost not to stake. Reduced staking incentives could reduce the pressure to sell in jurisdictions that count staking reward as income.
Multicoin considers that limiting inflation is worthwhile, even though it doesn’t cost the network in the technical sense.
Here’s a good example: Ethereum defined ETH, as ultrasound currency after becoming a Proof-of-Stake network. This led to reducing 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.
Multicoin’s JR Reed, a partner, told me that the idea was inspired by perpetual exchanges, which use funding rates to limit inflation, and not Ethereum.
Multicoin’s proposal has another obvious effect: SOL staking, which historically has remained higher than 7% in yield, will decrease as issuance drops. MEV rewards can be increased to compensate for lower inflation. Staking SOL will start to yield less dividends if issuance is reduced.
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