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Intro
Solana has employed an inflationary, uncapped supply model for its on-chain economic system. The economic model incentivizes validators to stake SOL, Solana’s native token on the network. The SOL token can be used on the network in five distinct ways:
- Power decentralized applications (dApps)
- Make payments
- Pay network fees
- Provide network security through staking
- Facilitate network governance
The Solana protocol reduces the SOL supply by eliminating 50% of total transaction fees while the remaining 50% is paid out to the network’s computing infrastructure providers (validators) who are incentivized to stake SOL tokens. Since fee revenue reduces supply while fees paid to stakers create an incentive for holding the token, these economics underpin SOL’s fundamental value model and make the digital token a productive capital asset.
As a result of Solana’s revenue-based supply reduction mechanism, the future total supply of SOL is unknown. While the total SOL supply will vary depending on network revenue, the rate of new token issuance is programmed into the Solana protocol through a predetermined inflation rate and long-term inflationary schedule.
Economic Incentives
Protocol-based inflationary rewards are distributed to validators from a determined “global supply inflation rate” in which the inflation rate is based on a predetermined schedule. For this schedule, Solana uses three distinct terms for their model:
- Initial Inflation Rate: The predetermined starting inflation rate in which the token issuance rate can only decrease.
- Dis-inflation Rate: The rate at which the inflation rate itself is reduced.
- Long-term Inflation Rate: The rate the Solana protocol is expected to hold over time to promote economic stability.
Solana operates in epochs. An epoch is a period of time defined as 432,000 slots (~2.5-3 days). A slot is an opportunity for a validator to produce a block.
Presently, the Solana Foundation has established the parameters for the inflationary model with an initial inflation rate of ~6%. This rate is set to decrease by a rate of 15% per year until the inflation rate reaches a long-term rate of 1.5%. It should be noted that any of these parameters are subject to change and don’t include other token supply impactors.
The current proposed inflation schedule for SOL on the Solana network, per Solana Documentation
The current estimated total supply growth for SOL on the Solana network, per Solana Documentation
Validators staking on the Solana network should expect their annual staking yield percentage to decrease gradually over time until it also arrives at a stable rate. For the SOL that isn’t staked, the dilution percentage will increase over time as that SOL isn’t receiving awards. In other words, staking negates dilution. As of 2024, SOL staking rewards have remained consistent at around ~6% gross (~1% adjusting for network inflation), with nearly 75% of the supply staked.
SOL staking. Launch of Solana
When Solana launched, it started with a supply of 500 million SOL. Solana was originally founded and funded through five seed rounds. Four of these rounds were private sales in which nearly 16% of the initial SOL tokens were sold. 62% of the initial 500 million SOL went to investors and the founders while 38% went to a community reserve.
These private funding rounds have been tracked by Binance Research in addition to the $314,159,265 token sale led by a16z and Polychain announced in June 2021. While the price for the a16z/Polychain round isn’t public, it was likely at a significant discount to the market price, which sat at $11.7 billion at the time, in exchange for a multi-year vesting schedule.
Overview of the expected supply schedule of Solana’s SOL token. Source
Graph depicting the token distribution of SOL, per Binance Research 
SOL's projected token distribution by the year 2028 projects better than rivals Cardano, Polygon, and others but suffers when compared to Ethereum. Source: K33 Research
The early days of Solana and the release of the SOL tokens began with controversy. In April 2020, the circulating supply of SOL on the popular exchange Binance was listed at 8.25 million. However, that month, another Solana wallet containing 13 million SOL (5 million more than the listed entire circulating supply!) tokens was unearthed by a community member.
The Solana team explained this wallet was from market makers which the team didn’t consider part of the actual circulating supply. The team announced they would recover the tokens and burn them all within 30 days to resolve the issue. However, ultimately, the team was only able to recover ~3.3 million worth of SOL and moved on from the issue. This meant that in the early days of the project, the circulating supply instantly doubled for early investors and the Solana team failed twice to properly resolve an issue. As the project and token price grew exponentially over the next 1.5 years, the issue seems to primarily be forgotten or simply an anecdote of the early days of the project.
