Solana's Upgrades: Slashing Validator Earnings, Boosting Staking Rewards

Solana's upcoming protocol upgrades, set to be voted on by validators in March, aim to strengthen the network's long-term health but may significantly impact validator earnings. According to VanEck, an asset management firm, the proposed upgrades, known as Solana Improvement Documents (SIMDs), could slash validator revenues by up to 95%, potentially threatening smaller operators.

The first upgrade, simd 0123, introduces an in-protocol mechanism to distribute Solana's priority fees to validator stakers. Traders can pay extra to validators for faster transaction processing, with priority fees accounting for 40% of network revenues. Currently, validators are not required to share these fees with stakers. The proposal, up for a vote on March 6, boosts staking rewards and discourages off-chain trading agreements between traders and validators, reinforcing on-chain execution.

The second upgrade, SIMD 0228, is the most impactful proposal under consideration. It adjusts SOL's inflation rate to inversely track the percent of token supply staked, potentially reducing dilution and lowering selling pressure from stakers who treat staking rewards as income. As of February, Solana's inflation rate stands at 4%, down from its initial 8% rate but still above its terminal inflation target of 1.5%. The inflation rate currently declines at a fixed rate of 15% annually.

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The proposals come as asset managers urge regulators to permit sol exchange-traded funds (ETFs) to list on US exchanges and to allow cryptocurrency staking in ETFs to enhance returns. Bloomberg Intelligence estimates the odds of SOL ETFs being approved in 2025 at around 70%.