Howdy!

It’s been a pretty big day for Solana news, and the Lightspeed team woke up feeling dangerous.

Today, we’ve got a proposal to shift SOL’s inflation, SOL’s liquid staking growth, and Jito nabbing Polygon’s chief legal officer:

Solana to weigh possible SOL inflation cut

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

The Austin, Texas-based firm published a Solana Improvement Document this morning that would change SOL emissions from the current fixed schedule to a market-based solution. Multicoin’s proposal would likely drive down inflation — which dilutes SOL holders — but would also lower staking yields, which are a boon for SOL stakers.

In Solana terms, inflation refers to the network issuing SOL to the validators who run Solana’s software and help build the blockchain. Validators then pass this issuance along with some MEV rewards to the stakers who delegate staked SOL to them. 

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

Solana’s inflation rate was initially set at 8%, and this figure will decrease by 15% yearly until it reaches 1.5% inflation. 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 fixed rate idea was borrowed from the Cosmos blockchain, and inflation is just “accounting.”

Yakovenko doesn’t care much about inflation, because the process of SOL issuance doesn’t create or destroy value, it simply moves value around. Newly-minted SOL gets passed along to stakers, while non-stakers see their holdings become relatively less valuable.

Still, Multicoin sees a reduction in SOL inflation as necessary for a few reasons. New SOL being passed only to stakers centralizes the network, high inflation reduces the usefulness of SOL for things like DeFi since there’s a high opportunity cost to not stake, and only 9% of staked SOL is liquid. Lower staking rewards could also reduce sell pressure in jurisdictions where staking rewards are counted as income for tax purposes. 

Even though issuance doesn’t technically induce a cost to the network as a whole, the negative perception created by unstaked SOL being diluted makes it worth limiting inflation in Multicoin’s view.

There’s some positive precedent here: Ethereum had narrative success defining ETH as ultrasound money after becoming a proof-of-stake network and greatly diminishing its issuance. But there’s also negative precedent in a different way: Cosmos adopted a market-based inflation mechanism for ATOM, but its community has quibbled over where the bounds should be — and ATOM’s price is still down 34% over the past year. 

In any event, Multicoin partner JR Reed told me the proposal was inspired by perpetual swaps and their use of funding rates, not Ethereum’s mechanism for limiting inflation. 

There’s one other obvious consequence of Multicoin’s proposal: SOL staking yield, which has historically stayed higher than 7%, would decrease if issuance decreased. A growth in MEV rewards could offset the lower inflation, but otherwise, staking SOL would begin to pay fewer dividends.

— Jack Kubinec

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Solana liquid staking is still up and to the right — it just has a long way left to grow:

Solana’s liquid staking penetration has historically stayed pretty low, with most SOL stakers opting to stake their tokens the old-fashioned way instead.

This is significant partly because Multicoin argues that less staked SOL would increase DeFi activity. In theory, LSTs could be used in DeFi, but they remain under 10% of all staked SOL.

— Jack Kubinec

Rebecca Rettig, formerly the chief legal and policy officer for Polygon Labs, is making a return to her DeFi roots. Starting next week, she’ll step into the role of chief legal officer at Jito Labs. Reflecting on the move, Rettig described Jito as “the right place at the right time,” pointing to its singular focus on the Solana ecosystem and the opportunity to engage with some of the most challenging issues in DeFi.

Rettig has been active in Web3 since at least 2018, when she began representing blockchain clients at Manatt, Phelps & Phillips LLP. She later served as general counsel at Aave Companies, overseeing legal and compliance efforts for one of the leading DeFi protocols. At Polygon Labs, her work included addressing policy issues related to MEV, cross-chain governance and staking frameworks.

Takeaway: The US government is expected to take a more crypto-friendly stance starting Monday. I wouldn't be surprised to see a lot of projects realigning their goals to capitalize on the shifting regulatory landscape. Jito Labs bringing someone with Rettig’s mix of technical and legal expertise into the fold shows how tackling thorny issues like MEV and staking requires the right people in place. Who’ll be next to step up with a move like this?

— Jeffrey Albus

A message from Eli Ndinga, head of strategy at 21Shares: