Solana’s native token, SOL, saw a 5% increase in value on May 27, rising from $161 to $171. This surge in price has given investors hope for continued growth, especially considering that SOL had recently reached $188.90 on May 21. One of the key factors contributing to SOL’s upward movement is the approval of the SIMD-0096 proposal by Solana’s validators. This proposal eliminates the 50% burn rate on priority transactions and sets it to 0%. As a result, all transaction fees will now be allocated to block producers from epoch 621 onwards. The aim of this change is to incentivize validators to prioritize network security and efficiency rather than engaging in arbitrage strategies.
The elimination of the burn mechanism might have a negative impact on the Solana Network, as it could increase 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 believe 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 approval by the SEC on May 23 caused ETH to reach $3,975 on May 27, close to 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 was considered a significant bullish catalyst. He argues that the market has focused excessively on the Ether ETF decision, overlooking SOL’s year-to-date gains of 69%, which closely mirror Ether’s 72% gains in the same timeframe.
Despite the varying interpretations of the impact of eliminating the burn mechanism, Solana’s network activity has remained stagnant over the past week. In comparison to Ethereum and its layer-2 solutions, Solana’s growth in network usage has been slow. Recent data from DappRadar shows that Solana’s DApps volumes only increased by 5% in the past week, significantly underperforming Ethereum’s 52% increase. The BNB Chain, on the other hand, saw a 22% increase in the same period, highlighting Solana’s relative underperformance.
In terms of active users, Solana experienced a 6% weekly decline in unique active addresses, 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. Additionally, Solana’s second-largest decentralized exchange, Raydium, saw a 16% drop in users this week, while its NFT marketplace, Magic Eden, experienced a 22% decline.
It is uncertain how much of SOL’s recent decline to $161 was influenced by speculation surrounding Ether’s ETF approval, and it is unclear how long it will take for these instruments to be available for 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 reach its previous high of $188.90.
Please note that this article does not provide investment advice or recommendations. Investing and trading involve risks, and readers should conduct their own research before making any decisions.