Solana’s native token, SOL (SOL), rose 5% on May 27, rising from $161 on May 26 to $171. This rise has raised investors’ hopes for continued growth, especially since SOL reached $188.90 just a few days ago, on May 21. An important factor in SOL’s upward movement is the offering designed to increase returns for validators instead of burning tokens, while network activity remains unchanged.
Solana no longer burns 50% of preferred transaction fees.
On May 27, Solana validators approved proposal SIMD-0096, which removes the 50% burn rate from priority transactions and sets it to 0%. As a result, starting from epoch 621, all transaction fees are allocated to block producers. These changes aim to incentivize validators to prioritize network security and efficiency over engaging in arbitrage strategies that involve transaction reordering or exclusion.
Maximum Extractable Value (MEV) refers to the profit a block producer earns by determining the order in which transactions are processed on the blockchain. With each block containing a limited number of transactions, validators can choose which pending transactions to include, often to the detriment of regular users who may face low execution prices in decentralized finance (DeFi) applications.
However, the SIMD-0096 proposal could have a negative impact on the Solana network by making SOL more inflationary, says Solana staking validator Laine. Despite the 4.6% annual issuance growth, Laine noted that there were no priority fees in May 2023, suggesting the effective inflation rate would revert to around 9.9% per year.
Some analysts believe that SOL’s recent price correction is a reaction to the decline caused by the approval of an Ethereum (ETH) exchange-traded fund (ETF) in the United States. With the SEC’s approval on May 23, ETH rose to $3,975 on May 27, just shy of its 2024 high of $4,090.
Analyst and investor Gumshoe suggests traders have turned bearish on SOL following the approval of the Ether spot ETF, described as a “once-in-a-lifetime bullish catalyst.” He argues that the market is overly focused on Ether ETF decisions, even though SOL’s 69% year-to-date gain over the same period is very similar to Ether’s 72% gain.
Solana’s network activity has been stagnant over the past week
Despite various interpretations of the impact of removing the burn mechanism, Solana’s network usage growth remains sluggish, especially when compared to Ethereum and Layer 2 solutions.
Recent data from DappRadar shows that Solana’s decentralized application (DApp) volume increased only 5% last week, significantly underperforming Ethereum’s 52% increase. The BNB chain increased 22% over the same period, highlighting Solana’s relative underperformance.
Related: Ethereum price chart suggests a breakout of the all-time high of $4,000.
In terms of active users, Solana’s 6% weekly decline in unique active addresses is closer to Ethereum’s 4% decline. However, competitors such as BNB Chain (BNB) and Polygon (MATIC) have seen active users increase by over 25%. Solana’s second-largest decentralized exchange, Raydium, saw a 16% drop in users this week, while NFT marketplace Magic Eden saw a 22% drop.
It is unclear whether SOL’s recent $161 drop was triggered by speculation about the approval of an ETF for Ether, and it is also unclear how long it will take for such a product to begin trading in the United States.
Given the stagnant on-chain activity and significant criticism of inflationary changes resulting from the removal of the burn mechanism, it seems unlikely that SOL will regain its previous high of $188.90 any time soon.
This article does not contain investment advice or recommendations. All investment and trading activities involve risk and readers should conduct their own research when making any decisions.