What the hell is SIMD-0096?
On Monday 27th May, Solana passed a proposal to change part of its current economic system by awarding validators 100% of the priority fees paid by users. To date, 50% of priority fees were awarded to the validator processing the transactions while the remaining 50% was burnt. As priority became a key driver of the total fees paid on Solana, they are becoming a major focus point for both users and validators.
The proposal ended up passing with 51.2% participating rate (50+% required for quorum) and 77% of those voting in favor of the proposal. The proposal itself is quite controversial and given the narrow participation rate, we think it’s summarizing the opposing sides’ arguments.
Those in favor…
The initial idea behind the SIMD is built upon a claim that validators are doing side-deals and provide priority for block inclusion to transactions where a user pays the validators directly additional SOL as opposed to using the priority fee mechanism to determine transaction priority. In simple terms, if I pay a validator 7 SOL directly or I pay 10 SOL in priority fee but the validator gets only 5 SOL (as the remaining 5 SOL is burned), the validator will obviously prefer my direct 7 SOL offer (not to confuse anyone, in reality, the priority or direct fee payments are in the magnitude of lamports not SOL).
As such, if 100% of the priority fee is awarded to the validators, the incentives are aligned and validators are less likely to use side deals for transaction inclusion.
In the discussion forums, those in favor generally argue that as validators earn more revenue, they can opt to share some of their revenue sources with stakers — for example, MEV rewards captured when running a Jito client or lowering staking commissions — so there is a net benefit to the stakers by giving validators 100% of the priority fees. Currently, there is no direct mechanism for validators to share priority fees with stakers, which is why validators would have to share from other revenue sources.
Some also argued that 100% priority fee to validators will allow smaller validators to cover their costs of running the infrastructure, which increases the overall decentralization of the network and therefore provides stronger security guarantees.
Overall, the argument is that by awarding validators 100% of the priority fee, incentives among network participants align, which will lead to greater efficiency and security of the chain as a whole.
Those against…
In the forum, there was quite a sizable opposition to the proposal, so let’s break down their key points. Some argued that there is a clear principal-agent problem. Since October 2023 governance advisory vote, only validators can vote on proposals and this is a revenue-generating proposal, which does not directly benefit stakers, only validators, which clearly presents a conflict of interest in situations like this. The discussion touched on the governance weakness of many DAOs and pointed to a potential solution in the form of quadratic voting mechanism. We were actually surprised we haven’t seen any discussion around futarchy as a potential solution, the new and Solana-native experiment to governance.
Others argued that the proposal doesn’t actually prevent validators from doing side deals as the validators will just pocket more from priority fees, while still generating P2P revenue on the side. Furthermore, priority fee distribution is somewhat proportional to the size of the validator, some viewed this proposal as leading to the notion of the rich-get-richer.
Several opponents in the discussion raised a concern that no one was able to quantify how big of a problem side-deals actually are and until it’s proven that this is actually a problem, no economic parameters of the network should be changed. Not only are economic changes given the current voting mechanism questionable, but they can also open the network to new attack vectors.
A very valid point we would like to highlight came from Overclock Validator who claimed that although the deflationary pressure from priority fee burn is minimal on the network at the moment, passing this proposal makes it so much harder to create a deflationary mechanism on Solana later.
Overall, the opposition’s main concerns surrounded the lack of clear proof for the existence of a problem the proposal was aimed at solving, which when coupled with the potential principal-agent problem and the inability of stakers to participate in the vote, created space for concerns.
So what?
The proposal’s outcome cannot be implemented until the Agave client is upgraded to at least version 2.0, which is expected sometime in Q3. As such, there is space to discuss any additional concerns and implement a proposal SIMD-0123, which aims to enable direct priority fee revenue sharing with stakers, thereby solving the key concern of the opposers.
One natural outcome, which we haven’t discussed yet is the effect of the change on the inflation rate of SOL. Burning 50% of the priority fees paid posed deflationary pressure on Solana and removing it increases the net inflation rate of the token. Interestingly, there was very little discussion around the effects of the burn on Solana’s net inflation rate. A fairly simple solution was offered by the validator Iaine, which estimates the effect to be 0.2% on the net inflation rate, an immaterial change and therefore, not worth discussing extensively.
In our view, the governance vote could have gone more smoothly if the problem was quantified and coupled with proposal SIMD-0123 to avoid principal-agent problem. The change currently does not pose an economic problem for the network and can lead to a more competitive space for validators, which will lead to a more efficient and better-performing network. Yet, any economic change to the protocol level, no matter how small, should be thoroughly evaluated and not taken lightly, supported by rigorous research and econometric modeling.
By Thomas Fanta
