Solana’s SIMD-0096 Promises Greater Rewards, But There’s a Hidden Cost

After passing with a 77% approval rate in May 2024, Solana’s SIMD-0096 update has finally gone live, effectively boosting block rewards for validators.

While the bulk of Solana’s onchain community is optimistic about higher APYs and increased LST (Liquid Staking Token) adoption, concerns have been raised about the impacts on native stakers and reward distribution transparency.

What are the implications of SIMD-0096 and what future updates will improve Solana further?

What is SIMD-0096?

Validators generate revenue through 3 main methods: $SOL issuance, MEV rewards, and priority fees. When added to a base transaction fee, priority fees help users ensure their transactions are executed during periods of network congestion.

Voted in by Solana validators, SIMD-0096 is a network update that tweaks how transaction priority fees are handled.

Prior to SIMD-0096, 50% of priority fees were collected by validators, while the remaining 50% were burnt and permanently removed from circulation. From today, 100% of priority fees are distributed to validators, effectively boosting rewards at the expense of token burns.

To ensure that LST holders don’t miss out on boosted priority rewards, Sanctum has automatically created an LST for every validator on Solana. This way, validators can simply allocate block rewards to their LSTs, guaranteeing value accrual for holders in line with increased priority fees.

In the spirit of true decentralized, Sanctum believes that LSTs are a public good and a gift to validators. Funds contributed to LSTs are automatically delegated, but aren’t officially affiliated to validators until claimed by the validator in question.

More Rewards, But At What Cost?

While increased validator rewards are undeniably popular among the Solana DeFi community, concerns have been raised surrounding how these additional priority fees can be transparently distributed to stakers.

Sol Strategies CTO Max Kaplan argues that SIMD-0096 is not a positive step towards trustlessness within the Solana network. In the short term, there is no verifiable way of tracking whether validators are fairly and transparently distributing rewards to stakers and LST holders.

According to Kaplan, SIMD-0096 introduces a measure of “trust me bro” to validator block rewards. This lack of transparency could ignite ‘yield wars’ with LST providers promising high, unverifiable APYs in a bid to attract more network stake.

Kaplan’s stance is further reinforced Blockworks researcher Dan Smith, who claims the new model benefits validators at the expense of holders. Smith contends that SIMD-0123 should have been implemented at the same time as SIMD-0096, with in-protocol mechanisms ensuring stakers receive fair rewards.

Additionally, SIMD-0096’s implementation harms native stakers. Native stakers will be temporarily excluded from earning the additional priority fees, due to the absence of a mechanism distributing extra fees from validators to delegators.

Due to its innovative Stake Auction Marketplace, Marinade Finance is currently the only provider capable of passing boosted rewards to native stakers.

Finally, SIMD-0096 is expected to increase $SOL’s inflation rate. With 50% of priority fees no longer being permanently removed from circulation, Solana’s burn rate will drop. The previous burn mechanism served as a countermeasure to token inflation.

Resolving SIMD-0096 Concerns

Fortunately, this period of vague and uncertain reward distributions should only be temporary. In the coming weeks, Jito’s tip router will enable validators to share increased block rewards to stakers in a transparent manner.

On a longer timeframe, SIMD-0123 implementation will ensure that increased block rewards are programmatically built-in to the Solana network at a protocol level.

More recently, a new governance proposal, SIMD-0228, aims to introduce a dynamic $SOL issuance schedule. If approved, SIMD-0228 would programmatically alter $SOL emissions in line with network activity to limit token inflation.

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