Understanding Inflation Rewards

To understand inflation rewards in Solana, we first need to grasp the concept of inflation within the Solana ecosystem. Inflation refers to the controlled increase in the total supply of SOL tokens over time, which is designed to incentivize network participation and maintain economic stability.

Staking rewards are distributed every epoch (approximately every 2 days) and are based on the inflation rate, the total amount staked, and the participant's share of the stake. These rewards are auto-compounded, meaning they are automatically re-staked to increase future rewards.

The inflation schedule in Solana is a key factor in determining the annual inflation rate, which directly impacts staking rewards. As shown in the graph, the initial inflation rate starts at 8% and decreases by 15% each year until it stabilizes at 1.5%.This gradual reduction in inflation is designed to control the supply of new SOL tokens over time.

To compute staking rewards, the current inflation rate is applied to the total supply of SOL, and a portion of this is distributed to stakers. For example, if the inflation rate is 5% and the total supply is 500 million SOL, then 25 million SOL would be newly issued, with a significant portion allocated as rewards to validators and delegators. This mechanism ensures that rewards are aligned with the network's economic model, encouraging participation while maintaining stability.