Will Solana’s Double Disinflation Plan Impact DeFi Returns? Insights from Analysts

Solana is implementing a new inflation-reduction measure known as the "Double Disinflation Rate" plan. This initiative is designed to lower the inflation rate from 4.5% to 1.5% over three years by increasing the disinflation rate from 15% to 30%. While this move aims to stabilize long-term staking rewards, some analysts are concerned that this might negatively affect short-term returns in the decentralized finance (DeFi) space.

Key Takeaways

The aim is to reduce Solana's inflation rate from 4.5% to 1.5% in three years by doubling the disinflation rate from 15% to 30%.
While short-term DeFi yields may suffer, the plan could help decrease long-term pressure from staking rewards.
Some community members are worried that this inflation-reduction proposal may impact DeFi yields adversely.
Analyst Ignas expressed concerns that Solana DeFi returns, particularly through liquid staking tokens (LSTs) like jupSOL, may become less appealing in the short run.
Ignas mentioned, “If rates drop, I would reconsider holding that position and even SOL itself. Although I admit, lower inflation is the right decision for the long haul and benefits the $SOL chart.”

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Understanding the 30% Disinflation Plan

The Solana Improvement Document (SIMD)-0411, dubbed the "Double Disinflation Rate" plan, proposes reducing the annual inflation rate by half. Currently, Solana's inflation is pegged at 4.5% per year, with the disinflation rate fixed at 15%. Therefore, under existing conditions, inflation could reduce to 2.5% over the next three years. However, this new proposal aims to enhance the disinflation rate to 30%, projecting that inflation could drop to just 1.5% within three years.

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Expected Effects on SOL Supply

Mert Mumtaz, the Founder of Helius Labs, believes this change will alleviate selling pressure from stakeholders who sell rewards to meet tax obligations. He described this proposal as a method to “plug the leaky bucket,” potentially saving the network millions through reductions in emissions.

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If the proposal is accepted, it is estimated that approximately 22.3 million SOL tokens could be taken out of the inflation schedule over six years, equating to around $2.9 billion in potential selling pressure at current market prices. The issue of Solana’s inflation has been debated for some time. Earlier this year, a more aggressive proposal sought an 80% cut in inflation but was rejected due to concerns about its impact on staking rewards. Mumtaz asserted that SIMD-0411 is not negative, though short-term worries—such as those mentioned by Ignas—have emerged. The ultimate decision will be made through community voting.

As of now, SOL is trading at $129, representing a 50% decrease from its peak of $253 in September.