Solana's SIMD 228 Inflation Proposal: Failure, Governance Challenges, and Future Vision

The recent failure of Solana's SIMD 228 inflation proposal has sparked intense debate within the cryptocurrency community. This article delves into the reasons behind the proposal's rejection, the challenges of blockchain governance, and Solana's vision for the future. We'll explore the implications for the network's security, validator economics, and long-term sustainability.

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The SIMD 228 Proposal: What Happened?

SIMD 228 was a proposed change to Solana's inflation mechanism that aimed to reduce the network's token issuance rate. The vote concluded with approximately 75% of Solana stake participating, but only 61% voting in favor – falling short of the required 66% supermajority for passage.

Mert, a prominent figure in the Solana ecosystem, shared his thoughts on the outcome: "I did not think it was a surprise. I actually asked for the vote to be delayed a few times before it even started because I did not think it could probably pass if you really tried." He further explained that at a certain point, he didn't want the proposal to pass due to the deep divisions it created within the community.

The Governance Process: Room for Improvement

One of the key takeaways from the SIMD 228 vote was the need for improvements in Solana's governance process. Mert expressed disappointment with how the process unfolded, noting that this was only the second major vote and the first contentious one for the network.

"The one thing that I was disappointed by was the process," Mert stated. "And some of it is due to how novel, let's say, governance is on Solana. This is really only the second vote and certainly the first contentious one."

He highlighted several issues with the process:

1. Timing: The proposal was introduced roughly three months ago, but most of the discussion and debate occurred in the final week before the vote.

2. Perception of rushing: While objectively the proposal wasn't rushed, the perception that it was rushed took precedence over facts.

3. Poor argumentation: Some opponents of the proposal used flawed logic or misleading arguments, which Mert felt detracted from productive discussion.

4. Lack of focus on proposal details: Much of the debate centered around peripheral issues rather than the specifics of the proposal itself.

The Economics of SIMD 228

The SIMD 228 proposal aimed to change Solana's inflation mechanism to incentivize revenue generation over passive issuance. Mert explained the rationale: "It changes a lot of things. So for example, let's say today issuance is 90% lower than it was before. Well, that's a pretty big shock to the economy, let's say, which means that now people are like, wait, how do we now make money? How do we get? How do we survive in this environment?"

This change would have pushed the network towards doubling block space, improving MEV infrastructure, and encouraging more on-chain activity. While the proposal's failure doesn't have immediate short-term effects, the long-term implications for Solana's economic model are significant.

Validator Voting Patterns

An interesting aspect of the SIMD 228 vote was the voting patterns among validators of different sizes. Larger validators were generally more supportive of the proposal, while smaller validators tended to oppose it.

Mert provided insight into this phenomenon: "If you actually looked at how the voting turned out, there was a lot of people who voted no at the very last second. And actually, those were the top 13 sandwiches on Solana, curious." He explained that the game theory behind voting often leads to a skew towards "yes" votes, as those opposed only need to vote "no" if necessary to prevent passage.

Additionally, Mert revealed that the perception of "small validators" on Solana is often misleading: "A lot of validators that are small are actually just one of the many heads of a hydra of a bunch of validators owned by the same entity." This insight challenges the common narrative around decentralization and validator distribution on the network.

The Solana Foundation Delegation Program

The discussion touched on the Solana Foundation Delegation Program (SFDP), which provides stake to smaller validators to help them get started. While this program has been beneficial for growing the validator set, Mert suggested that it may be time to reevaluate its role:

"I think it should be available to only app teams and core contributors. And then the existing ones probably need to be gradually phased out because I don't think, I'm not sure if it's helping the network at this point."

He argued that the program might be giving a false sense of security in terms of validator numbers, and that phasing it out could actually increase incentives for unsubsidized validators to join the network.

Solana's Vision: Beyond Inflation

Despite the setback with SIMD 228, Solana's long-term vision remains focused on scalability and efficiency. Mert emphasized the importance of increasing bandwidth and reducing latency: "The thing that I like about Solana is that it has a focus. And so if you work on this concept of blockchain at NASDAQ speed, or really the actual vision, which is harder to convey is it's a bunch of computers with the performance of one computer."

This vision aligns with Solana's goal of creating a more efficient and accessible financial system. Mert explained, "I think basically crypto is like a tech that improves or evolves capitalism because it fixes many things wrong with it. Like the weird take rates, the non-transparency, the, like I don't think it does all those today, by the way, like obviously there's still some pretty sketchy shit that happens. But like that's why we work on it."

L1 vs L2 Value Accrual

The podcast also touched on the broader debate of Layer 1 (L1) versus Layer 2 (L2) value accrual in the blockchain space. A recent report from Standard Chartered bank highlighted concerns about Ethereum's "midlife crisis" and the potential for L2 solutions to cannibalize value from the base layer.

Mert's perspective on this issue favors Solana's approach: "I think that was quite obvious the whole time, which is why we work on Solana. If you believed in that thesis, then we would have worked on Ethereum, obviously, because why not?"

He argued that Solana's model of having execution on-chain creates aligned incentives between app teams, infrastructure providers, and token holders. This alignment is something that Ethereum's L2-centric approach may struggle to achieve.

Ethereum's Scalability Challenges

The discussion on L1 vs L2 naturally led to a comparison with Ethereum's scalability challenges. Mert believes that Ethereum's solution lies in scaling the base layer: "I think the solution is to scale the L1. I think like there's just no way around that. So that needs to happen."

He expressed skepticism about Ethereum's current approach of relying heavily on L2 solutions, particularly as some L2s like Base are now pushing for L3 solutions, further distancing activity from the base layer. This trend could potentially lead to Ethereum being "cut out even more" from capturing value.

Solana's Next Five Years

As Solana celebrated its fifth birthday, the conversation turned to the network's future. Mert outlined several key areas of focus for the next five years:

1. Increased bandwidth
2. Reduced latency
3. Doubling block space
4. Eliminating or reducing malicious MEV
5. Enhancing decentralization
6. Improving security
7. Ensuring the network remains unstoppable

These goals align with Solana's vision of creating a high-performance, efficient blockchain that can support a wide range of financial and commercial applications.

The Role of Capitalism in Crypto

Mert presented a thought-provoking perspective on the relationship between cryptocurrency and capitalism. He argued that "crypto is basically capitalism, supercharged" or perhaps "the end state of it."

"I think basically crypto is like a tech that improves or evolves capitalism because it fixes many things wrong with it," Mert explained. He sees blockchain technology as a way to create a more efficient, fair, and transparent system of global commerce and finance.

This vision of crypto as an evolution of capitalism aligns with Solana's focus on high performance and efficiency. By creating a blockchain capable of handling large volumes of transactions at high speeds, Solana aims to unlock new possibilities for financial innovation and access to capital.

Governance and Decentralization

The failure of SIMD 228 raised important questions about governance and decentralization in blockchain networks. While Solana has made strides in increasing validator participation, the voting patterns revealed some potential issues.

Mert suggested that validator voting might not be the ideal method for all decisions: "Coinbase and Trent have the opinion that technically the only vote you need is what version client the values run to something a bit more like Bitcoin." This perspective raises interesting questions about the role of validators in network governance and how to balance technical decisions with economic ones.

The Future of Solana Inflation

Despite the failure of SIMD 228, the conversation around Solana's inflation mechanism is likely to continue. Mert mentioned that Austin Federa had proposed an alternative called "left curve 228" that would accelerate the decline of Solana's issuance to 1.5% more quickly.

However, Mert expressed some reservations about arbitrary changes to inflation: "The problem with that is it's just arbitrary again. And the concern that I have is anytime you have important parameters that are detached from the rest of the network, that's a system with no feedback."

This suggests that future proposals may need to find a balance between reducing inflation and maintaining a feedback mechanism that responds to network conditions.

Solana's Competitive Advantage

Throughout the discussion, Mert emphasized Solana's focus on performance and efficiency as key competitive advantages. By pursuing the vision of "blockchain at NASDAQ speed," Solana aims to eliminate inefficiencies in global finance and commerce.

This focus on performance sets Solana apart from other blockchain projects, particularly those struggling with scalability issues. As the crypto ecosystem continues to evolve, Solana's ability to handle high transaction volumes with low latency could prove to be a significant differentiator.

The Importance of L1 Scalability

While much of the blockchain industry has been focused on Layer 2 solutions, Solana's approach of scaling the base layer remains a point of distinction. Mert argued that this focus on L1 scalability is crucial for long-term success:

"There's a lot of engineers just doing super difficult work on the L1 at all times, like very annoying, very difficult work. And that you just can't get around that."

This commitment to improving the base layer could position Solana well as the industry continues to grapple with scalability challenges.

Challenges and Opportunities Ahead

While the failure of SIMD 228 represents a setback for Solana's inflation reduction plans, it also highlights the network's ability to handle contentious governance decisions. The high level of stake participation in the vote demonstrates an engaged community willing to participate in important decisions.

Moving forward, Solana faces several challenges and opportunities:

1. Refining the governance process to ensure more productive discussions and decision-making
2. Continuing to improve L1 scalability and performance
3. Balancing the need for validator subsidies with long-term sustainability
4. Attracting more developers and users to build on the high-performance infrastructure
5. Navigating the evolving regulatory landscape for cryptocurrencies

Conclusion: Solana's Path Forward

Despite the setback with SIMD 228, Solana's long-term vision remains focused on creating a high-performance, efficient blockchain capable of supporting a wide range of applications. The network's emphasis on L1 scalability, combined with its engaged community and growing ecosystem, positions it well for future growth and innovation.

As Solana enters its sixth year, the challenges highlighted by the SIMD 228 vote provide valuable lessons for improving governance and communication within the ecosystem. By addressing these issues and continuing to focus on performance and efficiency, Solana has the potential to play a significant role in the evolution of blockchain technology and its impact on global finance and commerce.

Facts + Figures

• SIMD 228, Solana's inflation reduction proposal, failed to pass with 61% of votes in favor, short of the required 66% supermajority.
• Approximately 75% of Solana stake participated in the SIMD 228 vote.
• The Solana Foundation Delegation Program (SFDP) currently accounts for about 19% of total stake on the network.
• Larger validators were generally more supportive of SIMD 228, while smaller validators tended to oppose it.
• Solana's current annual inflation rate is about 4.5%.
• Standard Chartered bank cut its 2025 price target for Ethereum from $10,000 to $4,000.
• The report claimed that Base, an Ethereum L2, has removed $50 billion in market cap from Ethereum.
• Solana's current market cap is approximately $65 billion.
• Solana celebrated its 5th birthday by Genesis block on the day before the podcast recording.
• The podcast hosts suggest that Solana needs to double its block space and reduce latency in the coming years.
• Mert claims that at least three validator teams on Solana have more stake than Helius, potentially two to three times more.
• The coefficient of decentralization on Solana is suggested to be less than half of the officially reported 19.

Questions Answered

What was SIMD 228 and why did it fail?

SIMD 228 was a proposal to reduce Solana's inflation rate and change its issuance mechanism. It failed to pass because it only received 61% of votes in favor, falling short of the required 66% supermajority. The proposal was controversial and created deep divisions within the Solana community, leading some supporters like Mert to ultimately prefer that it didn't pass in its current form.

How does Solana's governance process work, and what issues were highlighted by the SIMD 228 vote?

Solana's governance process involves stake-weighted voting by validators. The SIMD 228 vote highlighted several issues, including the timing of discussions (most occurred in the final week), perception of rushing despite a three-month lead time, poor argumentation from some opponents, and a lack of focus on the proposal's specific details. These challenges suggest that Solana's governance process may need refinement as the network matures.

What is the Solana Foundation Delegation Program (SFDP), and how does it impact the network?

The SFDP is a program where the Solana Foundation delegates stake to smaller validators to help them get started. It currently accounts for about 19% of total stake on the network. While it has helped grow the validator set, there are concerns that it may be giving a false sense of security in terms of validator numbers. Some argue that phasing out the program could actually increase incentives for unsubsidized validators to join the network.

How does Solana's approach to scalability differ from Ethereum's?

Solana focuses on scaling the base layer (L1) to achieve high performance and low latency, aiming for "blockchain at NASDAQ speed." In contrast, Ethereum has primarily pursued a strategy of relying on Layer 2 (L2) solutions for scalability. Solana's approach aims to keep execution on-chain, creating aligned incentives between app teams, infrastructure providers, and token holders, which may be more challenging to achieve with Ethereum's L2-centric model.

What are Solana's main goals for the next five years?

Solana's primary goals for the next five years include increasing bandwidth, reducing latency, doubling block space, eliminating or reducing malicious MEV, enhancing decentralization, improving security, and ensuring the network remains unstoppable. These objectives align with Solana's vision of creating a high-performance, efficient blockchain capable of supporting a wide range of financial and commercial applications.

How does cryptocurrency relate to capitalism, according to the podcast discussion?

Mert argues that cryptocurrency, and particularly projects like Solana, represent an evolution or "supercharged" version of capitalism. He suggests that blockchain technology has the potential to improve capitalism by addressing issues such as high take rates, lack of transparency, and inefficiencies in global finance and commerce. This perspective frames crypto as a tool for creating a more efficient, fair, and accessible financial system.

What challenges does Ethereum face regarding L1 vs L2 value accrual?

Ethereum is facing challenges with value accrual at the base layer (L1) as more activity moves to Layer 2 solutions. A recent report from Standard Chartered highlighted concerns about Ethereum's "midlife crisis" and the potential for L2 solutions to cannibalize value from the base layer. This trend could potentially lead to Ethereum being "cut out even more" from capturing value, especially as some L2s are now pushing for L3 solutions.

How does Solana plan to address the challenge of decentralization?

While Solana has made progress in increasing validator participation, there are still challenges regarding decentralization. The podcast discussion revealed that some large entities may control multiple "small" validators, potentially skewing perceptions of decentralization. Solana plans to address this by gradually phasing out the SFDP for non-core contributors, encouraging more organic growth of the validator set, and continuing to improve the network's performance to attract a diverse range of participants.