The Three Types of Rewards and Fees on Solana

June 19, 2024

Solana validators receive three kinds of rewards for making blocks on the network: inflationary, MEV, and block rewards. Validators can charge on-chain fees for inflationary and MEV rewards today, and will likely have the same option to share block rewards on-chain with stakers soon if an upcoming SIMD-0123 governance proposal passes. Therefore, stakers need to understand their blended fee across the three reward types to understand their staking rewards rate (SRR).

In this post, we’ll describe how these rewards impact your SRR, how fees work, and highlight upcoming governance proposals that might also affect your SSR.

Solana Staking Rewards

Solana’s staking rewards are designed to incentivize validators and delegators to participate in consensus. By staking their SOL tokens, participants help secure the network and earn a share of the network’s rewards, which come from three sources: inflation, MEV, and block rewards. 

Understanding the interplay between these different reward sources and the factors that influence them is crucial for stakers looking to maximize their rewards on Solana. In the following sections, we will dive deeper into each of these reward types and explore how Figment, as a leading staking provider, navigates this landscape to deliver optimal rewards for its customers.

Types of Solana Staking Rewards

Inflationary Rewards

The primary source of staking rewards on Solana is token inflation. Like most Layer 1 blockchains, Solana has an inflationary component that rewards stakers and validators with new token issuance at the protocol level for securing the network. Validators earn these rewards by submitting valid votes on blocks when selected as the slot leader, and the rewards are distributed based on the validator’s stake-weight (percent of network staked to a validator) at the end of each epoch.

Solana Token Inflation Emissions Schedule

At Solana’s genesis block (March 16, 2020), the inflation schedule started at 8% emissions and has decreased 15% every 180 epochs (~1 year) since. This emission reduction schedule has a long-term inflation target of 1.5%, and with existing projections should reach that target at roughly year 12-13 after the genesis block. This has a net deflationary effect coupled with fee burns over time, and incentivizes Solana token holders to delegate their tokens while staking reward rates remain high. Today (June 2024), inflation is estimated to be ~ 5.237%.

Below are Solana’s Inflation Schedule & Total Supply Charts:

How Solana Validators Earn Inflationary Rewards

There are many factors at play when it comes to earning inflationary rewards on Solana.

Validators that have more Solana delegated to them (stake-weight), experience a higher likelihood to be selected to produce blocks and may be the beneficiary of more inflationary rewards compared to validators with lower stake-weight. The probability of being selected as the leader for a slot is directly proportional to the validator’s stake-weight relative to the total SOL staked on the network.

Specifically, a validator’s probability of being selected as the leader is calculated as:

(Validator’s Stake-Weight) / (Total SOL Staked on Solana Network)

This linear relationship incentivizes validators to accumulate more ‘stake’ to increase their chances of being selected and earning more rewards. In other words, there is no penalty/decreasing rewards as validators accumulate more stake. 

Jito MEV on Solana

Jito is the first customized Solana validator client that integrates a MEV (Maximum Extractable Value) marketplace directly into its codebase. It is a fork of the official Solana Labs validator client but with additional functionality designed to capture and distribute MEV rewards. Using Jito, delegators can expect to receive 10-15% in additional Solana rewards.

The primary objective of Jito is to enhance staking rewards for both validators and stakers by enabling them to participate in MEV opportunities.  But how does this process work exactly? 

MEV Searchers who have identified arbitrage opportunities can submit a bundle of transactions to the Jito MEV marketplace and place a bid for those transactions to be included by the slot leader. In competition with other searchers bids, the slot leader selects the highest bidder in an auction and those transactions get included in that particular block. The highest bidder then pays an MEV tip to the slot leader for their transaction inclusion which is passed on to the validator and its stakers.  When you stake your SOL to a validator running the Jito client, like Figment, you become eligible to receive a portion of these additional MEV rewards earned by the validator.

As of May 2024, MEV tips account for nearly 14% of the total rewards received by Figment’s Solana validators, highlighting the significant boost in the staking reward rate that Jito can provide to stakers.

Solana Block rewards

Block rewards are a combination of base fees & priority fees paid out to a validator when they successfully propose a block as the slot leader. 

  • Base Fee is 0.000005 SOL (5,000 lamports) per signature 
  • Priority fee is determined by the sender and increases with transaction demand

In Solana’s current state, 50% of priority fees, base fees, and vote fees are burned.  After the passing of SIMD-0096, Solana is set to implement protocol changes that would allocate 100% of priority fees to the block proposer (slot leader) instead of burning the other 50%. This proposal aims to economically incentivize validators and encourage more validators to join the network. SIMD-0096 will be implemented with Agave 2.0 or validator upgrade v2.0.0 per the feature gate activation schedule which is estimated to be available September-October 2024.

Source

How Solana Fees Work and Calculating the Blended Fee

As a staker on the Solana network, it’s important to have a complete view of how the above rewards distributions work. Not only do you need to consider a validator’s staking reward rate performance, but the underlying fees it charges on-chain. Here we will dive into how you as a staking participant can select the right validator based on performance & fees.

Solana Inflation Performance & Fees

In order for a validator to earn the most inflation rewards, it needs to be online when selected as the slot leader. Validators that have higher uptime and participate more frequently in consensus voting are positioned to earn more inflation rewards that are earned when they vote on a slot as the leader. It’s also important as a staker to find validators that offer low fees on Solana staking rewards. Typically validators on Solana will charge anywhere between 5-10% on inflationary rewards.  

MEV Tips on Solana

Increasingly MEV rewards contribute a larger portion to the overall staking reward rate composition. You can see in the chart below, that Jito MEV tips continue to make up more and more of the overall rewards to validators and stakers on the network. This is due to the increase in on-chain transaction volume and arbitrage opportunities that come along with this activity. 

Many stakers are not aware, but there is a separate on-chain fee associated with MEV.  It’s important that stakers select the right validator with low Jito MEV on-chain fees so they can experience upside from increased on-chain activity. Many validators are not transparent about the fee being charged with some even charging a 100% MEV fee. In this case, the validator would capture all that value and not pass on any MEV tip rewards to stakers. You can find each validator’s Jito on-chain fee by searching them on StakeWiz.

Source

Calculating the blended fee

In review, as a Solana staker with validators supporting Jito, you need to be aware of two separate fee components – the standard validator fee on inflation rewards, and the validator’s specific fee policy for the additional Jito MEV rewards they distribute.

Combining these fees can paint a different picture of what a staker is being charged. See the below hypothetical example:

 

Figment Alternative
Total inflationary rewards earned 10,000 SOL 10,000 SOL
Staking Fee (inflationary) 7% 7%
Inflationary rewards for staker 9,300 SOL 9,300 SOL
Total MEV rewards earned 10,000 SOL 10,000 SOL
Jito MEV Fee 7% 100%
MEV rewards for staker 9,300 SOL 0 SOL
Total Rewards Earned for staker 18,600 SOL 9,300 SOL
Blended fee (inflation+MEV) 7% 53.5%

 

While validators may advertise low fees on inflation rewards, they could charge excessive, often unclear fees on Jito MEV rewards. These MEV fees could significantly increase your overall blended fee on total staking rewards. In the above example, MEV rewards are highly dynamic based on the MEV activity taking place on-chain. Blended rewards can vary depending on the amount of MEV activities but generally, MEV is showing a consistent trend of making up a significant portion of the total staking rewards rate and we anticipate that trend to continue as the chain continues to see more volume.

It’s important as a staking participant to scrutinize both inflation and MEV fee structures. A seemingly low inflation commission is misleading if the validator has set a high MEV fee.

Governance Impact to Solana Staking Rewards

Block rewards may become increasingly important to delegators as they have not historically been shared with stakers, but this may change if SIMD-0123 is passed and implemented. 

Traditionally, validators have received all block rewards that are not burned, however, if SIMD-0123 passes, we could see a distribution method similar to on-chain fee splits for inflationary rewards and Jito MEV rewards. 

If Solana continues to experience increasing demand for blockspace, priority fees will rise, making block rewards a higher percentage of total rewards on Solana. It only makes sense that validators pass along a portion of their block rewards to their delegators. Below, you will see that since December 2023, priority fees have made up the majority of fees on the network, and we’d like to see delegators capture that value after SIMD-0096 is implemented and SIMD-0123 potentially passes.

Source

Figment supports SIMD-0123 and, should the governance vote pass, intends to share block rewards with its delegators. This position is aligned with Figment already sharing Jito MEV rewards with customers. 

See below how block rewards continue to trend higher as on-chain activity continues to pick up

Conclusion

In summary, Solana validators earn rewards from three sources – inflation, MEV tips (Jito), and block rewards. While validators may advertise low fees on inflation rewards, they can charge excessive fees on the increasingly valuable Jito MEV rewards, significantly increasing the overall blended fee for stakers.

As a leading validator on Solana, Figment wants to offer fair & transparent rewards and share equitably with the stakers who contribute to the consensus of the network and believe in its long-term success. Figment will engage with and support future proposals that drive the overall success of the Solana ecosystem and all its stakeholders. It’s important that validators, stakers, and other ecosystem actors are aligned with economic incentives. 

Figment is the leading provider of staking infrastructure. Figment provides the complete staking solution for over 500 institutional clients, including asset managers, exchanges, wallets, foundations, custodians, and large token holders, to earn rewards on their digital assets. Figment is one of the largest validators on Solana and has deep experience in operating on the network. 

Institutional staking services from Figment include seamless point-and-click staking, portfolio reward tracking, API integrations, audited infrastructure, and slashing protection. This all leads to Figment’s mission to support the adoption, growth, and long-term success of the digital asset ecosystem. To learn more about staking, please meet with us.

The information herein is being provided to you for general informational purposes only. It is not intended to be, nor should it be relied upon as, legal, business, tax, or investment advice. Figment undertakes no obligation to update the information herein. 

SHARE POST

Meet with us

Bring the Complete Staking Solution to Your Organization

Hidden

Figment respects your privacy. By submitting this form, you are acknowledging that you have read and agree to our Privacy Policy, which details how we collect and use your information.