Solana’s native token, SOL, saw a 5% surge on May 27th, climbing from $161 on May 26th to $171. This increase has sparked optimism among investors, especially considering that SOL had reached $188.90 just days earlier on May 21st. The proposal to increase yields for validators instead of burning tokens has played a significant role in SOL’s upward movement, although network activity remains unchanged.
Solana’s validators have approved the SIMD-0096 proposal on May 27th, which eliminates the 50% burn rate on priority transactions and reduces it to 0%. As a result, starting from epoch 621, all transaction fees will be allocated to block producers. This change aims to ensure that validators prioritize network security and efficiency instead of engaging in arbitrage strategies involving transaction reordering or exclusion.
Maximal extractable value (MEV) refers to the profits that block producers can make by determining the order of transaction processing on the blockchain. Validators have the power to choose which pending transactions to include in each block, which can disadvantage regular users who may experience poorer execution prices in decentralized finance (DeFi) applications.
However, the SIMD-0096 proposal may have a negative impact on the Solana Network by increasing SOL’s inflation. Laine, a Solana staking validator, notes that despite the yearly issuance increase of 4.6%, priority fees were absent in May 2023, suggesting that the effective inflation rate would revert to approximately 9.9% annually.
Some analysts speculate that the recent price adjustment of SOL is a reaction to the approval of an Ether exchange-traded fund (ETF) in the United States. The Securities and Exchange Commission’s approval on May 23rd propelled ETH to $3,975 on May 27th, just shy of its peak of $4,090 in 2024.
Gumshoe, an analyst and investor, suggests that traders turned bearish on SOL following the Ether spot ETF approval, which he describes as a “once in a lifetime bull catalyst.” He argues that the market has overly focused on the Ether ETF decision, ignoring the fact that SOL’s year-to-date gains of 69% closely align with Ether’s 72% in the same timeframe.
Despite different interpretations of the impact of removing the burn mechanism, Solana’s network usage has been stagnant compared to Ethereum and its layer-2 solutions.
According to recent data from DappRadar, Solana’s decentralized application (DApps) volumes have only increased by 5% in the past week, significantly underperforming Ethereum’s 52% increase. BNB Chain saw a 22% increase in the same period, highlighting Solana’s relative underperformance.
In terms of active users, Solana experienced a 6% decrease in unique active addresses over the past week, which is similar to Ethereum’s 4% decrease. However, competitors like BNB Chain and Polygon have seen increases in active users of 25% or more. Raydium, Solana’s second-largest decentralized exchange, saw a 16% drop in users this week, while its NFT marketplace Magic Eden experienced a 22% decline.
It is unclear how much of SOL’s recent decline to $161 was influenced by speculation surrounding the Ether ETF approval, and it is also uncertain when these instruments will start trading in the U.S.
Considering the stagnant on-chain activity and the significant criticisms of the inflationary changes resulting from the elimination of the burn mechanism, it seems unlikely that SOL will soon regain its previous high of $188.90.
Please note that this article does not provide investment advice or recommendations. All investment and trading decisions involve risks, and readers should conduct their own research before making any decisions.