Solana’s upgrade doubles validator incentives

Solana’s recent network upgrade, SIMD-0096, has reshaped how priority fees—extra fees users pay for faster transaction processing—are distributed. Previously, 50% of these fees were burned, while the rest went to validators. Now, 100% of priority fees go directly to validators—the operators who confirm transactions—boosting their earnings and incentivizing participation. While this strengthens Solana’s validator ecosystem, it has sparked concerns among stakers, who no longer receive priority fee benefits unless shared manually by validators.

To address this, a new governance proposal, SIMD-0123, aims to automate priority fee distribution between validators and SOL stakers. If approved, this could prevent misleading APY claims from liquid staking providers, ensure fairer fee allocation, and improve transparency by allowing stakers to verify rewards directly on-chain. Voting is expected to begin by March 8.

What is its impact?

• Increases staker yields automatically: Allows seamless priority fee distribution, potentially boosting staking rewards without relying on validator discretion.
• Prevents “Yield Wars” and misleading APY claims: Reduces the risk of liquid staking providers exaggerating yields, a concern that arose after SIMD-0096.
• Restores fair value distribution: Rebalances incentives between validators and token holders, ensuring a more equitable staking ecosystem.
• Enables automated fee sharing: Validators could programmatically distribute priority fees to delegators via smart contracts, removing manual intervention.
• Enhances transparency and accountability: Stakers can verify their rewards directly on-chain, eliminating the need to trust validator self-reporting.

‍What do I make out of this?

It is important to note that Solana’s fundamentals may take time to gain fruition, as Solana perseveres through this wave of external market events:

• $LIBRA Fallout: The token, launched on Solana and endorsed by Argentina’s president, hit $4B in market cap before collapsing 80% due to insider sell-offs.
• Bybit’s $1.5B Hack: Although affecting Ethereum, the news triggered broader market sell-offs, impacting Solana.
• Upcoming SOL Unlocks – 11.16M SOL (~2% of total supply) could enter the market on March 1, adding potential selling pressure.

With these factors at play, investors should remain cautious and focus on Solana’s fundamentals amid market turbulence.

• SIMD-0096: With this proposal implemented last month, validators will be able to receive 100% of transaction priority fees, instead of the previous 50/50 split where half was burned. This change aims to improve validator incentives, enhance network security, and create a more efficient fee market.
• SIMD-0123: To be voted on, this proposal aims to distribute priority fees to stakers, addressing concerns from SIMD-0096, which allocates all fees to validators. This update ensures fairer rewards and reduces reliance on validators for distribution by integrating the process into the protocol.
• SIMD-0228: Another proposal that would dynamically adjust SOL token emissions based on staking participation levels. This is quite important, especially after getting rid of the burn mechanism, as the proposal may reduce Solana’s inflation by up to 80%.