Solana Network Update: SIMD 96, Staking Yields, and DeFi Landscape Changes

In a recent episode of the Lightspeed podcast, host Jack welcomed Carlos Gonzalez Campo, an analyst at Blockworks Research, to discuss the current state of the Solana network. The conversation delved into various aspects of Solana's ecosystem, including recent protocol changes, staking dynamics, and shifts in the decentralized finance (DeFi) landscape. This article provides an in-depth analysis of the key points discussed in the podcast, offering insights into Solana's evolving ecosystem and its implications for users, developers, and investors.

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SIMD 96: A Game-Changing Update

SIMD 96, activated on February 12, 2025, marks a significant change in Solana's fee structure. This update redirects 100% of priority fees to validators, whereas previously 50% of these fees were burned. The primary goal of SIMD 96 was to discourage out-of-protocol arrangements for transaction inclusion, effectively addressing a economic inefficiency in the network.

Unintended Consequences

While SIMD 96 aimed to solve specific issues, it has led to some unexpected outcomes:

1. Increased Network Inflation: Prior to SIMD 96, network inflation was around 3.7% annualized. Post-activation, it has risen to approximately 4.6%, representing a 1% increase in annualized inflation.

2. Reduction in Token Holder Net Income: The new fee structure has created a misalignment between validators and stakers. Currently, there is no in-protocol mechanism for validators to share priority fees with stakers, leading to a potential decrease in staker rewards.

3. Staking Yield Dynamics: The change has highlighted the need for more efficient ways to distribute priority fees to stakers. While some protocols like Jito, Marinade, and Sanctum have offered alternatives, these solutions are not ideal and often lack transparency.

Carlos Gonzalez Campo emphasized the importance of these changes:

"There's currently no in-protocol way in Solana to share priority fees back to the stakers. So what's happening right now is that previously 50% of that priority fee was burned. Now the validator keeps 100% of it and they don't distribute anything back to the stakers."

Staking on Solana: Rationality and Yield

The podcast discussion revealed an interesting observation about staker behavior on Solana. Despite the changes brought by SIMD 96, there hasn't been a significant shift in staking patterns. This suggests that Solana stakers, in aggregate, may not be as yield-sensitive as one might expect.

Liquid Staking Token (LST) adoption remains relatively low at around 10%, despite the potential for higher yields through priority fee distribution. This behavior raises questions about the factors driving staking decisions on the Solana network.

Jack, the host, noted:

"I think one of my takeaways from a month into SIMD 96 is that stakers aren't very rational in the aggregate on Solana. Like their stakers have not gone where the yield is higher."

This observation highlights the complex dynamics at play in Solana's staking ecosystem and suggests that factors beyond pure yield may be influencing staker decisions.

Priority Fees and Network Dynamics

Contrary to some expectations, the implementation of SIMD 96 has not led to a significant decrease in priority fees. The median priority fee has remained largely unchanged since the activation of the update, barring some volatility during specific events like token launches.

Carlos explained:

"If you look at the data, the medium priority fee basically remains on chain, unchanged. So obviously we're three weeks in from the activation of SIMD 96. So it's a small sample size where activity on the network has been low."

This stability in priority fees challenges the assumption that removing the 50% burn would lead to lower fees. It suggests that other factors, such as network congestion and user behavior, may play a more significant role in determining fee levels than previously thought.

The Changing Landscape of Decentralized Exchanges on Solana

A significant development in Solana's DeFi ecosystem is the announcement that Pump.fun, a popular meme coin launchpad, is building its own Automated Market Maker (AMM). This move represents a shift away from Raydium, which has been the primary beneficiary of Pump.fun's token launches.

Implications for Raydium

The decision by Pump.fun to create its own AMM could have substantial implications for Raydium:

1. Volume Impact: Approximately 40% of Raydium's trading volume comes from Pump.fun-launched tokens. Losing this volume source could significantly affect Raydium's market position.

2. New vs. Old Pools: Analysis shows that about 70% of Raydium's volume comes from pools less than 30 days old, underscoring the importance of new token launches to the platform's success.

3. Market Reaction: Raydium's token price dropped by around 30% when news of Pump.fun's AMM plans leaked, reflecting market concerns about the platform's future volumes.

Carlos provided insight into the potential impact:

"We found that around 70% of Raydium's volume comes from pools that are less than 30 days old, which is a pretty insane statistic in my opinion. And so, what that tells you is that for sure, what's more important for Raydium is like these new coins that are graduating every week, every day, and that are going and trading on that exchange."

The Meme Coin Phenomenon and Its Impact on Solana

Meme coins have played a significant role in driving activity and volume on Solana. However, recent events, such as the controversial Malay Libra launch, have led to some disillusionment among users and a decline in overall meme coin enthusiasm.

REV Decline in February

February 2025 saw a notable decline in Revenue Earned by Validators (REV) on Solana, with estimates suggesting a drop of around 50% compared to January. This decline can be attributed to several factors:

1. Meme Coin Fatigue: The market appears to be experiencing some level of saturation and disillusionment with meme coin launches.

2. Comparison to January's Activity: The extraordinary events of January, including a meme coin launch associated with a high-profile public figure, set a high bar that was difficult to maintain.

3. Changing User Sentiment: There's growing concern about the fairness and sustainability of meme coin launches, potentially leading to reduced participation.

Carlos offered a balanced perspective on this trend:

"I remain somewhat pessimistic in terms of like meme coin volumes in the next month. I don't think they will match like what we saw in the past, but at the same time you cannot discount like human behavior and like all it takes is just one meme coin to bring it all back as the way it was before."

Solana's Maturing Ecosystem

Despite the challenges posed by fluctuating meme coin interest, Solana's ecosystem shows signs of maturation and diversification. The network is attracting institutional interest and witnessing innovation in DeFi applications beyond meme coins.

Institutional Interest and DeFi Innovation

Several developments highlight Solana's growing appeal to institutional players and DeFi innovators:

1. New DeFi Protocols: Platforms like Amina and Drift are introducing sophisticated financial products to the Solana ecosystem.

2. Institutional Adoption: Established financial institutions, such as Franklin Templeton, are launching products on the Solana network, signaling growing mainstream acceptance.

3. Stablecoin Growth: The supply of stablecoins on Solana has seen significant growth, with USDC supply increasing approximately 5x over the past year.

Carlos emphasized the importance of this diversification:

"I think that Solana is not just meme coins and the network is reaching a point where it's like in a maturing state. We are seeing a moment of big institutional interest and also real innovation in DeFi applications."

Stablecoin Dominance on Solana

An interesting aspect of Solana's ecosystem is the dominance of USDC among stablecoins on the network. Unlike Ethereum, where Tether (USDT) holds the majority market share, Solana's stablecoin landscape is heavily skewed towards USDC, issued by Circle.

USDC Dominance and Regulatory Implications

The prevalence of USDC on Solana could have significant implications:

1. Regulatory Alignment: USDC's dominance (around 80% market share) potentially positions Solana as more aligned with U.S. regulatory standards.

2. Growth Trajectory: USDC supply on Solana has grown by about 5x in the past year, indicating strong inflows and growing trust in the network.

3. Institutional Appeal: The preference for USDC may make Solana more attractive to institutions seeking regulatory-compliant stablecoin options.

Carlos noted the potential advantages of this situation:

"I think Solana in some way is more like US based, if you want to call it that way. And so it can, I think better benefit for increasing regulatory like clarity coming from the US with this administration."

SIMD 228: The Next Big Update

As Solana continues to evolve, attention is turning to SIMD 228, a proposed update that could significantly impact the network's economic model.

Key Aspects of SIMD 228

1. Inflation Adjustment: SIMD 228 aims to replace Solana's current set emissions curve with a more market-driven issuance model.

2. Lower Inflation: The proposed change would likely result in lower overall inflation for the Solana network.

3. Validator Rewards: The update could potentially reduce the rewards from issuance that go to validators.

Institutional Perspective on SIMD 228

The podcast discussion brought an interesting institutional perspective on SIMD 228, particularly regarding its potential impact on staking yields:

1. Nominal vs. Real Yield: While SIMD 228 might reduce nominal yields, the real yield (derived from network fees and economic activity) would likely remain stable.

2. Institutional Products: Some financial products, like staking ETPs (Exchange-Traded Products), currently benefit from higher nominal yields to offset management fees.

3. Long-term Vision: The discussion emphasized that Solana should be viewed as a growth asset rather than a yield-generating instrument.

Carlos, drawing from his institutional background, explained:

"If a, like, if an institution doesn't want exposure to Solana because they don't get like two or 3% extra basis points, I don't think they really understood like the Solana thesis."

The Future of Solana: Beyond Meme Coins and Yield

As Solana continues to mature, the ecosystem is likely to see a shift towards more sophisticated DeFi applications, increased institutional involvement, and potentially a more stable economic model. While meme coins have played a significant role in driving activity on the network, the future of Solana appears to be moving towards a more diverse and robust ecosystem.

Key Areas to Watch

1. DeFi Innovation: Keep an eye on new DeFi protocols launching on Solana, particularly those offering unique financial products or services.

2. Institutional Adoption: Monitor announcements from traditional financial institutions regarding Solana-based products or services.

3. Regulatory Developments: Changes in the regulatory landscape, particularly regarding stablecoins, could significantly impact Solana's growth trajectory.

4. Network Upgrades: Future updates like SIMD 228 will play a crucial role in shaping Solana's economic model and overall appeal to different types of users and investors.

Conclusion

The Solana ecosystem is at an exciting juncture, balancing the energy of meme coin enthusiasm with the maturity required for long-term sustainability and institutional adoption. As the network continues to evolve through updates like SIMD 96 and the proposed SIMD 228, it's clear that Solana is positioning itself as a serious contender in the blockchain space, capable of supporting a wide range of applications beyond just meme coins and simple DeFi protocols.

The growth in stablecoin supply, particularly USDC, coupled with increasing institutional interest, suggests that Solana is on a path towards greater mainstream adoption. However, challenges remain, particularly in balancing the interests of different stakeholders within the ecosystem and navigating the complex regulatory landscape.

As Carlos Gonzalez Campo aptly summarized:

"I largely think like SIMD 228 can be beneficial for the network as a whole and reduce like selling pressure coming from, um, yeah, basically issuance rewards and also, uh, like reduced the dilution of naked Sol holders."

This perspective encapsulates the ongoing evolution of Solana – a network striving to optimize its economic model while fostering innovation and attracting a diverse range of users and developers. As the blockchain space continues to mature, Solana's ability to adapt and innovate will be crucial in maintaining its position as a leading smart contract platform.

Facts + Figures

• SIMD 96 was activated on February 12, 2025, redirecting 100% of priority fees to validators instead of burning 50%.
• Network inflation increased from 3.7% to 4.6% annualized after SIMD 96 activation.
• Liquid Staking Token (LST) adoption on Solana remains low at around 10%.
• 70% of Raydium's volume comes from pools less than 30 days old.
• Raydium's token price dropped by approximately 30% when news of Pump.fun's AMM plans leaked.
• REV (Revenue Earned by Validators) declined by about 50% in February 2025 compared to January.
• USDC commands around 80% market share of stablecoins on Solana.
• USDC supply on Solana has grown by approximately 5x over the past year.
• Ethereum's stablecoin landscape is dominated by Tether (USDT) at 55%, while Solana is dominated by USDC.
• Meme coins account for about 60% of DEX volume on Solana in recent months.
• Raydium has around 80% market share for meme coin trading on Solana.
• About 80% of Raydium's volumes come from meme coins.
• Approximately 40% of Raydium's trading volume comes from Pump.fun-launched tokens.
• Stablecoin supply on Solana grew as much in the three days after a high-profile meme coin launch as it had in the prior 320 days.
• SIMD 228 proposes to replace Solana's current set emissions curve with a more market-driven issuance model.

Questions Answered

What is SIMD 96 and how does it affect Solana?

SIMD 96 is a Solana network update that redirects 100% of priority fees to validators, instead of burning 50% as was done previously. This change aims to discourage out-of-protocol arrangements for transaction inclusion and has led to increased network inflation (from 3.7% to 4.6% annualized) and a reduction in token holder net income. The update has also highlighted the need for in-protocol mechanisms to distribute priority fees to stakers.

How has SIMD 96 impacted staking on Solana?

SIMD 96 has revealed that Solana stakers may not be as yield-sensitive as expected. Despite the potential for higher yields through priority fee distribution, Liquid Staking Token (LST) adoption remains low at around 10%. This suggests that factors beyond pure yield are influencing staking decisions on the Solana network. The update has also created a misalignment between validators and stakers, as there's currently no in-protocol way for validators to share priority fees with stakers.

What changes are happening in Solana's DeFi landscape?

Solana's DeFi landscape is experiencing significant shifts, particularly in the decentralized exchange (DEX) sector. Pump.fun, a popular meme coin launchpad, is building its own Automated Market Maker (AMM), moving away from Raydium. This could impact Raydium's market position, as about 40% of its trading volume comes from Pump.fun-launched tokens. Additionally, new DeFi protocols like Amina and Drift are introducing sophisticated financial products to the Solana ecosystem, signaling a maturation beyond meme coins.

How significant are meme coins to Solana's ecosystem?

Meme coins play a crucial role in Solana's ecosystem, accounting for about 60% of DEX volume in recent months. However, there are signs of m

eme coin fatigue, with February 2025 seeing a notable decline in Revenue Earned by Validators (REV), estimated at around 50% compared to January. Despite this, the ecosystem is showing signs of diversification and maturation, with growing institutional interest and innovation in DeFi applications beyond meme coins.

What is the stablecoin situation on Solana?

Solana's stablecoin landscape is dominated by USDC, which commands around 80% market share. This is in contrast to Ethereum, where Tether (USDT) holds the majority. USDC supply on Solana has grown approximately 5x over the past year, indicating strong inflows and growing trust in the network. This USDC dominance could potentially position Solana as more aligned with U.S. regulatory standards, making it attractive to institutions seeking regulatory-compliant stablecoin options.

What is SIMD 228 and how might it affect Solana?

SIMD 228 is a proposed update to Solana that aims to replace the current set emissions curve with a more market-driven issuance model. This could result in lower overall inflation for the Solana network and potentially reduce rewards from issuance that go to validators. While it might reduce nominal yields, the real yield (derived from network fees and economic activity) would likely remain stable. The update is seen as potentially beneficial for the network as a whole, reducing selling pressure from issuance rewards and dilution of non-staking SOL holders.

How is institutional interest in Solana evolving?

Institutional interest in Solana is growing, with established financial institutions like Franklin Templeton launching products on the network. The dominance of USDC among stablecoins on Solana may make it more attractive to institutions seeking regulatory-compliant options. However, the discussion highlighted that institutions should view Solana as a growth asset rather than purely a yield-generating instrument, emphasizing the importance of understanding the broader Solana thesis beyond short-term yields.

What are the key areas to watch for Solana's future development?

Key areas to watch in Solana's future development include ongoing DeFi innovation, particularly new protocols offering unique financial products. Institutional adoption trends, regulatory developments (especially regarding stablecoins), and upcoming network upgrades like SIMD 228 will play crucial roles in shaping Solana's economic model and overall appeal. The balance between maintaining the energy of meme coin enthusiasm and fostering more sophisticated, sustainable applications will be critical for Solana's long-term success.