Solana community voted in favor of fair distribution of priority fees

The Solana community, those holding and staking SOL (the native token), voted in favor of the Solana Improvement Document (SIMD) proposal SIMD-0123, aiming to enhance the distribution of priority fees between validators who verify transactions on the Solana blockchain and stakers who secure the network by locking up SOL.

They also voted against SIMD-0228, and we’re relieved. Here’s why: The document proposed linking SOL’s token issuance to the staking participation rate, making inflation responsive to network conditions rather than a fixed schedule. 

The implementation of SIMD-0096 in February, doubled validator rewards by keeping all priority fees after they’ve been removing 50% out of the circulation (known as the burn mechanism), to redirect them to validators. 

However, it also means inflation would increase; the proposal aimed to address that issue but was rejected due to concerns over economic instability and reduced validator rewards. In other words, many smaller validators depend on staking rewards to cover operating costs. A sharp reduction in emissions could make it harder for them to stay profitable, leading to validator exits.

SIMD-0228: A Dynamic Inflation Model (Rejected)

Currently, Solana follows a fixed disinflationary model, starting at 8% annual inflation, decreasing 15% yearly, until reaching 1.5% permanently. SIMD-0228 proposed a dynamic inflation system, adjusting SOL issuance based on staking participation:

• Low staking participation: Higher emissions (to incentivize staking and strengthen security).
• High staking participation: Lower emissions (to prevent unnecessary dilution).

While this would have adapted to market conditions, the proposal was rejected (61.39%) due to concerns over economic instability and reduced validator rewards. Critics argued that unpredictable inflation could discourage institutional participation and drive smaller validators out of the network, increasing centralization risks.

SIMD-0123: Fairer Priority Fee Distribution (Approved)

The community approved SIMD-0123, which redistributes priority fees between validators and stakers. Currently, validators receive 100% of priority fees, a change introduced by SIMD-0096 to boost security. However, this led to concerns over fairness, as stakers (who delegate SOL to validators) were excluded from these rewards.

With SIMD-0123, validators can now share priority fees with stakers via smart contracts, improving transparency, fairness, and decentralization.

While there are risks associated with the implementation of the approved proposal:

• Lower validator earnings: Could weaken validator incentives.
• Operational complexity: Smart contract-based distribution adds technical challenges.
• Validator competition and centralization: Larger validators may offer higher fee shares, attracting disproportionate staking power.

There are also some benefits crucial to Solana’s financial health: 

• Fairer rewards: Stakers receive a portion of priority fees, encouraging broader participation.
• Improved transparency: On-chain verification reduces reliance on validator trust.
• Reduced off-chain manipulation: Direct protocol-based fee-sharing enhances security.

The approval of SIMD-0123 enhances staking incentives and security, potentially increasing staking participation. The rejection of SIMD-0228 is also a win because it would maintain its fixed disinflationary model. While validator centralization risks remain, these changes could boost Solana’s long-term sustainability and institutional confidence in its economic framework.