Solana To Ditch Token Burning and Divert 100% Of Priority Fees To Validators

Solana validators are set to enjoy a bump in earnings following the passage of a new governance proposal.

On May 27, the Solana community approved proposal SIMD-0096 to allocate 100% of priority fees to network validators and abandon the network’s token burning mechanism. The proposal passed with a strong majority of 77% votes cast in favor.

Priority fees on Solana are optional fees that users pay on top of base transaction fees to ensure that their transactions are prioritized ahead of the standard transaction queue. At present, priority fees are equally divided between rewards for validators and a token-burning mechanism intended to control SOL inflation — which stands at 1.5% annually.

However, SIMD-0096’s implementation won’t be activated for several months.

Efficiency vs inflation

The proposal to divert all priority fees to validators stemmed from concerns that the previous system may encourage side deals between network users and block producers, undermining network integrity.

“For example, consider a scenario where a transaction submitter wishes to prioritize their transaction,” the proposal said. “Under the existing model, they might opt to directly pay the block producer a 75% priority fee to ensure their transaction is processed promptly, rather than paying a 100% priority fee where the block producer only receives 50%.”

The proposal garnered mixed responses from prominent validators. Everstake, Jito, and Solend believe the proposal better aligns incentives and improves network efficiency, while Step Finance, Triton, and Solana Compass oppose the change.

Hanko Baggins from Bandito Stake warned that eliminating the burn mechanism could lead to excessive SOL inflation. “While our bags would significantly benefit from the increased fees, I am not comfortable with removing the burn mechanism,” Baggins said.

“Validators are leaning towards being greedy, which isn’t great news for retail investors,” added X user, dmoutouss.

Anatoly Yakovenko, Solana co-founder, expressed support for the proposal, emphasizing the inefficiencies of the current system’s Jito tips — which are the share of priority fees paid to validators to prioritize transactions.

Yakovenko said that the current system requires users to pay double the priority fee when competing to provide Jito tips due to the network’s burn mechanism. He described the priority fee burn as a bug in the system, arguing that it forces users to overpay and benefits validators disproportionately.

As such, Yakovenko characterized Solana’s current Jito tips mechanism as creating inefficiencies for users.

“Users currently have to pay 2x higher priority fees to outbid Jito tips,” said Yakovenko. “Jito tips aren’t burned so validators get 100% of the tip. To be included in the block, a user has to pay 2x priority. It’s just busted.”

Solana’s transaction fees spiked to an all-time high of $0.06 on March 18 amid a prolonged period of heavy congestion on the network that persists to this day. Although transaction fees have since dropped to $0.016, costs remain higher than on several leading Ethereum Layer 2s, including Arbitrum, Linea, and Starknet, according to GrowThePie.

According to Dune Analytics, more than 56% of transactions have failed on Solana throughout May.

Congestion impacts Solana’s performance

Despite Solana’s meteoric price gains at the tail-end of 2023, the network has persistently struggled with network congestion and outages in recent years.

In September 2021, a surge in bot activity led to a 17-hour network outage. In 2023, another major outage was triggered by heavy network traffic following a software upgrade, requiring that validators manually restart the network. In February, the Solana blockchain network suffered five hours of downtime.

Despite these setbacks, Solana continues to set records for transaction throughput.

CoinGecko research shows that Solana achieved a peak daily average of 1,504 transactions per second (TPS), making it 46 times faster than Ethereum, which managed around 22.7 TPS at its peak. However, it’s important to note that Ethereum is scaling via Layer 2 solutions, significantly bolstering Ethereum’s TPS capacity on L2.

Solana’s high throughput is largely due to its unique Proof of History (PoH) consensus mechanism, which allows for efficient and rapid transaction processing.

At the time of writing, SOL was trading at $157 after shedding 7% in the past seven days, according to CoinGecko.