Editor's Note: This article discusses the impact of Solana's SIMD-0228 proposal on the profitability of validators, by constructing a model to estimate the number and profitability of Solana validators under different scenarios, including changes in inflation, fees, and MEV.
The following is the original content (edited for readability):
The SIMD-0228 proposal for Solana has generated a lot of discussion, but I haven't seen much data on its impact, so I built a model.
After the implementation of SIMD-0228, Solana may lose an additional 50 to 250 validators, depending on the revenue adjustment scenarios.
But first, why did I build this model? Because I think the direction of this proposal is right, but I'm worried that the supporters pushing for it don't think the data is important.
Here is the link to the model, there is no single correct answer, and I believe many aspects can be improved, and the assumptions can be further refined. But this is a starting point, and I welcome feedback from the community.
What is the goal of this model?
It aims to estimate the number of validators that can remain profitable under different Solana fee/price decline scenarios, given the current and proposed SIMD-0228 inflation rates.
The model starts with the current staking and FDV supply, using the current staking rewards rate and the rewards rate provided by the SIMD-0228 calculator. Anyone can replicate the model and adjust the staking rate to stress test.
Next, it analyzes the assumptions on network fees. I used the actual 2024 fees provided by Blockworks as a starting point, and then reduced them by 20%, 50%, and 80% (keeping the voting fees constant). The model then calculates the portion that gets burned to arrive at the final validator fees.
The staking distribution data comes from Solana Beach, and the model uses the average staking amount for each validator tier, assuming the distribution remains unchanged in all scenarios. However, I believe staking may become more concentrated under SIMD-0228.
The model then uses the average staking share to estimate the SOL fees and inflation rewards that a typical validator in each tier can earn.
The model then analyzes the actual non-0% and non-100% commission validators (100% commission validators are likely private validators) in each tier to estimate the optimistic case of SIMD-0228's impact. It assumes that the commissions validators receive from delegators come from three sources:
1. Inflation rewards: The model uses the actual average commission (excluding 0% or 100% commission validators) for each validator group provided by Solana Beach.
2. Transaction fees (voting fees, base fees, priority fees): The model assumes 100% goes to the validators.
3. Jito MEV tips: The model assumes validators receive 10% of the MEV earnings.
Are these data completely accurate? No. But they are based on discussions with validators. I welcome further feedback from the community.
One more thing to note: SIMD-0228's reduction in inflation rate may indirectly affect fee allocation. After inflation decreases, delegators may further compress validators' fee and MEV revenue shares to offset the decline in earnings. Therefore, I believe the profitability of validators may have more downside risk than what the model shows.
The commission ratio directly affects the amount of SOL income that validator operators receive from each source (inflation rewards, transaction fees, MEV).
The model then uses different SOL price (USD) assumptions and the same fee scenario changes as before to calculate the dollar value of the income that validators receive from each source. Note the data at the bottom, comparing the current inflation curve with SIMD-0228, and how the proportion of inflation rewards in total income changes under different scenarios, showing the increasing importance of inflation.
The model then estimates the annual cost of running a Solana validator, which is around $85,000.
The fixed costs come from discussions with validators, who said running two servers plus bandwidth costs $1,500 to $2,000 per month. The model also estimates the variable voting costs based on different SOL prices and current transaction fees.
The community is currently discussing adjusting the voting fees to help smaller validators reduce costs. You can adjust different levels of voting fees in the model to observe the impact.
The model then derives the average profitability of validators by tier. What do the data tell us?
· The smallest 250 validators are still not profitable, but remain online, which may be related to Solana Foundation's delegation program.
· At the current price and fee levels, validators in the 751-1000 tier may become unprofitable under SIMD-0228.
· If revenue declines by 20%, the Solana network may lose an additional 250 validators (in the 501-750 tier) under SIMD-0228, who would have been profitable otherwise.
· Similarly, the 501-750 tier validators may continue to be profitable/online in the current model until their revenue declines by -50%.
· In the case of an 80% revenue decline, only the top 250 validator tiers may remain profitable under SIMD-0228, while if inflation remains unchanged, the top 500 validators may still be profitable.
Through the profitability analysis by validator tier, the model examines the optimistic and pessimistic scenarios for the number of validators the network may use.
· The pessimistic scenario assumes that all unprofitable validators will leave the network.
· The optimistic scenario assumes that only non-0% and non-100% commission validators will leave the network.
How many validators should Solana have?
I don't know the answer. This is a question for the community to decide. I hope this model can help people think about the impact of SIMD-0228 through data rather than intuition.
What are my thoughts on SIMD-0228?
I may be neutral now. I previously opposed it, mainly because I felt no one had done enough analysis to understand its impact. What could make me support it?
Reduce the voting fees before implementing SIMD-0228
Add an adjustment factor that targets not only the staking rate, but also the number of validators
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