Author: Jack Kubinec, Blockworks; Compiled by: Wu Baht, Golden Finance

Multicoin Capital is one of Solana’s early investors. Now it is trying to change the network’s inflation mechanism.

The Austin, Texas-based company released a Solana improvement document this morning that will change SOL issuance from the current fixed schedule to a market-based solution. Multicoin’s proposal may reduce inflation (which would dilute SOL holders), but would also reduce staking yields, which would be a boon to SOL stakers.

In Solana terminology, inflation is when the network issues SOL to validators who run Solana software and help build the blockchain. Validators then pass this issuance along with some MEV rewards to the stakers who delegated the staked SOL to them.

In short, Multicoin’s proposal sets a target staking rate of 50% for security and decentralization purposes. If more than 50% of SOL is staked, issuance is reduced to discourage staking by lowering the yield. If less than 50% of SOL is staked, issuance is increased to increase yields and encourage staking. The minimum inflation rate will be 0% and the maximum inflation rate will be based on the current Solana issuance curve.

Solana's inflation rate is initially set at 8%, a number that will decrease by 15% each year until it reaches an inflation rate of 1.5%. SOL's inflation rate is currently around 4.8%, according to Solana Compass. Solana co-founder Anatoly Yakovenko said on the Lightspeed podcast that the idea of ​​fixed rates was borrowed from the Cosmos blockchain and that inflation is just “accounting.”

Yakovenko isn't too concerned about inflation because the SOL issuance process doesn't create or destroy value, it just transfers it. The newly minted SOL will be passed to the stakers, while the assets of non-stakers will be relatively devalued.

Nonetheless, Multicoin believes that lowering the SOL inflation rate is necessary for several reasons. Simply passing new SOL to stakers centralizes the network, high inflation reduces SOL's usefulness for things like DeFi, as the opportunity cost of not staking is high, and only 9% of staked SOL is liquid. Lower staking rewards can also reduce selling pressure in jurisdictions where staking rewards are considered tax income.

While technically the issuance imposes no cost on the entire network, Multicoin believes that uncollateralized SOL is dilutedThe negative perception created makes limiting inflation worthwhile.

There are some positive precedents here: After becoming a proof-of-stake network and significantly reducing ETH issuance, Ethereum successfully defined ETH as an ultrasound cryptocurrency. But there’s negative precedent on the other hand: Cosmos adopted a market-based inflation mechanism for ATOM, but its community has been debating where the line should be — and ATOM’s price has still fallen 34% over the past year.

Regardless, Multicoin partner JR Reed told me that the proposal was inspired by perpetual swaps and their use of funding rates, rather than Ethereum’s mechanism for limiting inflation.

Multicoin’s proposal has another obvious consequence: if issuance decreases, so will the SOL staking yield (which has historically remained above 7%). The growth in MEV rewards can offset lower inflation, but beyond that, staking SOL will start paying out less dividends.