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Solana started the year as one of the most promising blockchains, but reports of inflated transaction volumes, high bot activity, and hundreds of millions of dollars paid out each month to network validators have become some of the industry’s most debated topics.
Magazine decided to sort out the myths from the facts. Some of the claims are partly true, while others are misleading.
Claim: Solana’s inflation rate is too high
Some industry watchers criticize the network for its high inflation rate, often quoting Messari’s statistic that the circulating supply of SOL has risen 13.4% over the past year.
Solana’s actual inflation rate for SOL’s total supply started at 8% in 2021 and has since dropped to around 5% as of Sept. 6. The network plans to reduce inflation by 15% annually until it reaches its target rate of 1.5%.
There is a long history of bootstrapping networks as they get up to speed, but supporting metrics raise concerns about the current sustainability of Solana’s economic model.
Solana earned $31 million in fees in August, of which $15.5 million was erased through its 50% fee-burning mechanism. The network paid out $335 million in block rewards, meaning it “spent” $319.7 million more than it took in fees, according to Token Terminal.
Couple that with the month’s average token price of $147.76, and an estimated 73,327 SOL entered the Solana economy daily throughout August.
“They’re printing roughly $10 million worth of Solana every single day (depending on the price of SOL). That’s a lot of money that goes to validators who can easily go ahead and put a portion of that back into transaction fees to make their DEX volumes much higher,” crypto educator David Bostik, also known as DB Crypto — who has been a vocal critic of the blockchain — tells Magazine.
But Solana is not the only inflationary chain in the world. In fact, very few cryptocurrencies are productive assets, according to Mads Eberhardt, senior crypto analyst at Steno Research.
Even Bitcoin, the leading cryptocurrency by market capitalization, has been inflationary for over 15 years. It had a worse August earnings result on Token Terminal at $830 million in the negative.
“As is the case with Bitcoin and Solana, the inflation rate often decreases over time,” Eberhardt says, adding that Solana’s emission model can be sustained as long as there is sufficient demand to offset it.
The good news is that Solana appears to meet Eberhardt’s requirements, hitting the headlines on occasion for leading the industry in categories like stablecoin transfers and DeFi volume.
Those who don’t stake pay inflation tax
Solana burns half of the fees earned, which is aimed at counteracting inflation.
So far in 2024, Solana has earned $335.83 million in fees and burned $167.91 million. Meanwhile, it paid out $2.5 billion in rewards and incentives, according to Token Terminal.
“Even though Solana’s transactional revenue has increased this year, mainly due to the memecoin frenzy, SOL’s price has also markedly increased, which means that the emission has increased in fiat-money terms. As a result, much more SOL is issued than the blockchain takes in through transaction fees,” says Eberhardt.
This emission is compensated to stakers, meaning SOL investors who don’t stake their coins are subject to ongoing dilution.
“It is important to note that this is the nature of nearly every blockchain, as effectively none are, at this moment, sufficiently funded by their transactional revenue, not even Ethereum,” Eberhardt adds.
Claim: Transaction volume is inflated by bots
Critics point out that a significant portion of its transactions is inflated by bot activity rather than genuine user demand. All networks have bot activity, but even so, Solana’s bot activity is high.
Solana’s daily active addresses surged from around 2 million at the beginning of August to peak at around 5.5 million on Sept. 10, Artemis data shows.
Solana is no stranger to leading the industry in statistics, but when it does, the results are often taken with a grain of salt. Its success is usually followed by social media posts claiming the metrics are boosted by bots.
One contributing factor is the low transaction fees — a key selling point for Solana — which has made it easier for bots to exploit the network.
“Bots pay fees, just to be clear,” Austin Federa,head of strategy at the Solana Foundation, tells Magazine.
“The bot transaction question always really bugs me because no one can ever define what they mean by a bot. What they mean by a bot generally is things of lower economic value. But that is the point of a network like Solana — there’s a lot of stuff that’s not economically viable and not economically possible in the Ethereum ecosystem today.”
Claim: Bots are Solana’s top customers
In April, Solana made headlines when 75% of the network’s transactions failed. This number had dropped to 37% by Sept. 16, Dune Analytics data shows.
The high failure rate of Solana transactions again points to large numbers of bots making lots of low-fee transaction attempts.
In February, Magazine investigated the mysteriously large stablecoin volume on Solana, which resulted from failed transactions on DEXs fueled by rampant bot spam.
The top DEXs on Solana use central limit order books, which record all order activity, including unfinalized orders. This means transfer volumes are counted even if trades are unfilled or canceled.
“So if I, for example, go ahead and place an order for $100 million and then remove it instantly, it counts as volume, which you don’t see anywhere else,” Bostik says.
“That’s why they were able to accumulate over $1 trillion worth of volume in a month.”
Moreover, Solana gained popularity as the go-to chain for memecoins throughout the year, but this double-edged sword — largely driven by degenerate traders — also brought a surge of scammers and rug pulls.
Scammers have been creative with their memecoin projects, often using bots to automate the launch of countless tokens and washtrade their volumes, many of which led to rug pulls.
Coinbase “protocol strategist” Viktor Bunin questioned how several memecoins with little liquidity were generating immense 24-hour trading volumes on Raydium, the largest Solana DEX by total value locked at $840.89 million.
For instance, token pairs with as little as $1 in liquidity saw $7.9 million in daily trading volume and generated $19,811 in fees.
Can someone explain to me what’s going on with @RaydiumProtocol? Seeing a bunch of very low TVL, but very high volume pools. $100m+ daily volume with $100 TVL.
Are folks just providing a little bit of their own liquidity, juicing volume, and then pulling their liquidity out? pic.twitter.com/cVpahcYcpB
— Viktor Bunin 🛡️🇺🇸 (@ViktorBunin) July 24, 2024
While Solana’s adjusted non-vote transaction rate remains higher than most blockchains, the demand for the network’s usage can be misleading, as a significant portion of these transactions is suspected to be inflated by bot activity.
“To say bot demand is somehow not the same as other types of demand — we can weigh moral equivalency, but economic equivalency, they’re the same,” says Federa.
Claim: Solana’s real TPS is much less than claimed
Solana’s theoretical peak is advertised at 65,000 TPS, but in practice, it typically ranges from 2,500 to 3,500 TPS, Solscan data shows.
However, not all those transactions represent user activity.
Duncan Townsend, smart contract engineer at 0x, tells Magazine that Solana counts vote transactions—which are simply validators voting to confirm blocks—as part of its TPS.
He couldn’t think of any other chains that do so and agrees with criticisms that vote transactions don’t reflect user activity and that including them misrepresents network usage.
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On Sept. 16, the network’s average non-vote TPS was around 450, according to Solscan—significantly lower than the 3,274 TPS reported on the same day, which included vote transactions.
“This number is still absolutely high compared to other networks,” Townsend says while comparing Solana’s volume to Ethereum and its layer-2 networks. It’s around double the Ethereum ecosystem’s TPS, including all its L2s.
According to Federa, one reason vote transactions contribute to the network’s TPS is because the action costs fees, a model unique to Solana.
Because Solana’s network fees are so low, the network can charge these vote transactions as it would any other transaction.
“One thing that it does is it keeps validators aware of what transaction costs are,” Federa tells Magazine.
“In most networks, validators have an incentive to basically collude and to jack up the cost of transactions as high as possible, and they have an incentive to directly oppose any efforts that are made to make transactions cheaper because that means less money for them,” he adds.
Essentially, Solana validators have the same incentives as users to keep transaction fees as low as possible, a key selling point for the network.
Inside a Solana block
Solana’s non-vote TPS is still higher than most blockchains, but a chunk of its “high demand” comes from activities that don’t reflect real user interactions.
“If you try to sift through a single block and see what’s an actual transaction versus other fluff, you’re going to be there for an hour because there’s so much junk in there,” Bostik tells Magazine.
In December, X user Dave analyzed four consecutive Solana blocks starting from block 237254804. The user isolated transactions that could be considered a “transaction” on other chains, such as asset movements or account creations.
The analysis found that the four blocks reported 5,914 transactions over a 1.6-second window, but only 28 transactions — or 17 per second — met the criteria for a real user interaction.
Solana’s long-term success must balance inflation and demand
Token inflation isn’t a problem unique to Solana, as Eberhardt points out.
“But at least the inflation rate is often known well in advance — sometimes for many years — and, in many cases, it is set in stone,” Eberhardt says.
He adds that the cryptocurrencies most likely to perform best are those with the lowest inflation and those with the highest transactional revenue.
“These two properties ensure that holders can be rewarded in monetary terms, similar to equities — a trend that is gradually becoming the default as more institutions begin operating in the space.”
The network’s inflation is designed to decrease over time, and if Solana can foster real demand, it may eventually reach sustainability.
While Solana has benefited from its low fees and high theoretical throughput, critics argue that bot activity often inflates its transaction volume, creating an inaccurate image of the network’s demand. In response,Federa contends that bot activity also represents network demand.
The current high TPS numbers don’t necessarily reflect genuine user activity, and Solana’s long-term viability depends on ensuring user demand keeps pace with its inflationary model.
But Federa says Solana’s inflationary model isn’t set in stone, and the community can vote to adjust it if necessary.
“There are very few governments in the world that are self-sufficient — they all need taxes or something like a bunch of oil to sell,” Federa says.
He adds, “Certain amounts of public service and goods work done on networks do require a certain amount of issuance.”
So, if Solana has a 5% inflation rate at the moment, Federa says Solana holders need to generate better yields, whether through staking or DeFi farming, to shield themselves from inflation penalties.
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Yohan Yun
Yohan Yun is a multimedia journalist covering blockchain since 2017. He has contributed to crypto media outlet Forkast as an editor and has covered Asian tech stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking, and experimenting with new recipes.