VanEck: March upgrades to the Solana network could reduce validator revenues by 95%

What’s new? The planned Solana upgrades are important for the long-term health of the network but could hit validators’ revenues, has said Matthew Sigel, the head of digital asset research at investment firm VanEck. In March, for example, validators will vote on two proposed upgrades known as SIMDs (Solana Improvement Documents). These are designed to guarantee rewards for stakers and adjust the inflation rate of the SOL native token.

Source: X.com

What else is known? Both proposals have sparked “significant controversy” as they could cut validator revenues by 95%, potentially putting smaller operators at risk, Sigel wrote in his X account.

The first improvement, numbered SIMD 0123, will introduce a mechanism to allocate priority fees to stakers. Currently, traders can pay validators extra to process transactions faster, and such priority fees account for 40% of the network’s revenue, according to Sigel.

That said, validators are not currently obligated to share priority fees with stakers. Such an obligation affects other forms of revenue, such as voting rewards.

The proposal, which will be voted on March 6, would not only provide rewards for staking but would “also discourages off-chain trading agreements between traders and validators.”

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Staking involves locking SOL tokens as collateral with a validator on the Solana blockchain network. Stakers receive SOL payments from network fees and other rewards but risk losing their SOL collateral in the event of improper behavior by the validator. This can happen in the case of slashing, which is a penalty imposed on a validator for irregularities in transaction processing.

The second proposal, SIMD 0228, would adjust the SOL inflation rate. It is designed to track the proportion of tokens in staking to the total volume in circulation, and “reducing dilution and lowering selling pressure from stakers who treat staking rewards as income, Sigel explained.

As of February, Solana’s inflation rate stands at 4%, down from the original 8% but still well above the 1,5% target.

Vishal Kankani of Multicoin Capital was the primary author of the SIMD 0228 proposal. This venture capital firm owns a significant position in Jito, Solana’s most popular staking pool.

According to developer Jito Labs, as of December, more than 93% of Solana validators were using Jito software to maximize blockchain processing revenue.

The proposals come at a time when a number of investment firms have applied to launch Solana-based exchange-traded funds (ETFs) in the United States. Potential issuers are also asking regulators to allow coins purchased on behalf of investors to be placed in staking to increase yields. Bloomberg Intelligence estimates the probability of SOL ETF approval in 2025 at 70%.