According to CNBC, the GENIUS Act passing marks the first major legislative win for the crypto industry and already Web2 giants like Amazon and Walmart are reportedly already moving toward stablecoin-style offerings2. They won’t be the only ones. I predict that we are about to see a flood of stablecoin issuance as everybody from TradFi businesses and payment networks to Web3 stablecoin projects acts to secure their footing in this fast-growing sector.

And that brings us to the core question: If every player starts issuing their own stablecoin, how do you know which ones are solid and which are just liquidity traps?

To answer that, we need to unpack what makes a “good” stablecoin and that’s what this post is about.

Why This Conversation? Why Now?

The general consensus of the wider crypto community seems to indicate that crypto mass adoption is coming from sectors like Artificial Intelligence (AI) or Real World Assets (RWA). Yet in the past 5 years, the stablecoin sector has been one of the most quietly dominant sectors in all of crypto.

According to data from RWA.XYZ, the total on-chain market cap of stablecoins has grown from $4 billion in 2019 to $230Bn+ (as of 2025). That’s an astounding 5,650% increase in less than 6 years3. Data also shows that stablecoins have a monthly transfer volume of over $2.8Tn with more than 30 million addresses actively trading monthly.

Meanwhile, Stablecoin projects are also enjoying a great deal of capital inflow on the fundraising scene. Circle recently raised a staggering $1.1Bn from its IPO4. Ubyx –a global clearing and settlement network for Stablecoins backed by top venture capitalists like Galaxy and Coinbase Ventures just raised $10 million in a seed funding round. Plasma raised $1 billion in just 30 minutes.

All of the above signal one important thing: There is a huge demand for quality stablecoin products and from all indications, this demand is only going to continue growing. With the pace of growth and the expected surge in stablecoin issuance and adoption, it is a no-brainer that there will be both good and bad stablecoin products. More specifically, there will be bad actors seeking to capitalize on the space’s increased visibility and liquidity inflow.

If you plan to stay safe amidst the incoming chaos, there is one question you should be asking, “What makes a good stablecoin?”

But first, what are stablecoins?

A stablecoin is a type of cryptocurrency that has its value pegged to another asset (usually one with relative stability), in order to maintain a stable price or valuation. Examples of assets stablecoins can be pegged to include fiat currencies like the U.S. dollar, commodities like gold, and even other cryptocurrencies like Ethereum (although these are far less common due to increased susceptibility to volatility)5.

A typical example of a stablecoin is the USDc by Circle which is pegged 1:1 to the U.S. dollar. This means that every USDc can be redeemed for approximately $1 or its equivalent value in other cryptocurrency tokens or fiat6.

From the above explanation, three things are immediately clear. For a token to be considered a stablecoin, it has to:

1. Be pegged to a stable asset (or less volatile asset) like the U.S. Dollar

2. It has to be built on a decentralized network –that is, it operates on a blockchain, allowing for transparency, programmability, and trustless transactions.

3. It must have redemption capability –meaning holders should be able to “redeem” stablecoins for the equivalent of the underlying asset.

Types of stablecoins

Stablecoins are categorized based on the type of asset they’ve been pegged to for stability and value. On that note, here’s an overview of the types of stablecoins currently available:

1. Fiat-pegged stablecoins: This type of stablecoin is by far the most popular one on the market. These stablecoins are typically pegged 1:1 to an underlying fiat currency like the Euro and USD. Examples include USDt, USDc, and EURc.

2. Commodity-pegged stablecoins: As the name implies, these stablecoins are pegged to physical assets like gold and silver. They are designed to mimic and represent the valuation of the underlying commodity, thereby offering users exposure to these commodities without them actually having to own the assets. A popular example is PAX Gold (PAXG) a stablecoin where each token unit represents one troy ounce of gold secured in a professional vault7.

3. U.S. Treasury-backed stablecoins: These stablecoins have their asset value tied to U.S. treasuries and repurchase agreements. Because of this, they can offer one unique feature that other types of stablecoins don’t offer: yields. Common examples include USDY by Ondo and USYC originally by Hashnote (it is worth mentioning that Circle acquired Hashnote in January 2025)8.

4. Crypto-backed stablecoins: These are stablecoins backed by reserves of specific cryptocurrency assets. I know what you’re thinking, “But crypto is volatile, right?” You’re correct, and that’s why the issuers of crypto-backed stablecoins use a mechanism called “over-collateralization” to maintain asset value. What this simply means is that instead of pegging the stablecoin in the common 1:1 ratio, you have something like 1:1.5(and above). This helps the stablecoin maintain its value during periods of market fluctuation. An example is DAI which is backed by ETH reserves.

5. Algorithmic stablecoins: Unlike other types of stablecoins, these ones are not directly pegged to a collateral. Instead, they rely on dynamic supply and demand adjustment using a smart contract for value stability. While this is an innovative approach to stablecoin issuing, it has been historically proven to be quite unsafe. The TerraUSD $UST collapse of 2022 which wiped out millions of dollars from the market comes to mind9. Stablecoins like Ethena’s USDe and FRAX which employ algorithmic mechanisms for stability actually only do so partially, combining it with collateralization.

What makes a “good” stablecoin?

With the GENIUS Act passing in Congress and the stablecoin market growing at a ridiculous pace, it is expected that more stablecoins will be issued into the market. Do we really need so many stablecoin solutions? Maybe not, but that doesn’t change market sentiments about what’s likely to happen.

According to a Forbes article, Traditional giants like Amazon and Walmart are considering developing their own stablecoins10. They won’t be the only ones. Add this to the currently present severe need for secure, seamless, and fast cross-border payment solutions, especially in LATAM and Africa and the implication is clear: payments are evolving and there is a ready market for stablecoins to service.

For the general crypto space, this is good news since it signals better adoption metrics. However, it is also important to point out that increased adoption also means increased proliferation of sub-standard (or outrightly fake) stablecoin products. So the question is how do you sift through the noise to identify the good ones?

This question is harder to answer than it appears at first glance. The reason is because people have different values and aims for holding stablecoins. For those looking for a low-risk avenue to earn profits, a “good” stablecoin must include yield-bearing mechanisms. For people interested in stablecoins for cross border payments, the priority will be stablecoins that a widely accepted and easily accessible with deeper liquidity and very low fees. I could go on and on, but you probably get the point by now.

That said, regardless of personal biases, there appears to be a general consensus on what features a good stablecoin should possess. These features more or less serve as the foundational building blocks and any additional preferences build on them. They include the following:

1. Reserves and liquidity

A good stablecoin should be backed by transparent and verifiable reserves. Ideally, you should be able to see what’s backing your stablecoin and track how it’s doing per time. In addition to this, the stablecoin should also have enough liquidity depth. This is to ensure that it can easily handle significant transfer demand that could be placed on it without significant slippage or delays, even under pressure.

2. Collateralization mechanics

A good stablecoin must have a solid collateralization mechanism that perfectly secures the value of the stablecoin. The stablecoin may be backed by fiat, crypto, treasury bills, algorithmic rebalancing, or any combination of all of the above. The main point is that its value must be secured. Now here’s where subjectiveness may come in.

Depending on your view of blockchain technology, decentralization and aims for holding a stablecoin, your definition of “good collateralization mechanism” may be different. However, all that is moot if the stablecoin does not have strong collateralization. A balanced 1:1 collateralization is popular for stablecoins backed by fiat currencies. But for other types of stablecoins, an over-collateralization approach appears better because it offers more stability.

3. Infrastructure

Again this is another point of division. Some people prefer fully decentralized stablecoins, in keeping with Satoshi’s vision of breaking away from TradFi completely. However, in situations where this isn’t available, my recommendation will be to settle for stablecoins issued by high-trust corporations or business entities. But all of this is on the trust scene.

Beyond this, infrastructure should also be evaluated for technical flexibility and accessibility. A good stablecoin should also have multi-chain availability for enhanced utility. Bonus points if it’s chain-agnostic and interoperable across ecosystems. The rationale is that the more ecosystems a stablecoin can operate in seamlessly, the more utility and adoption it can achieve.

4. Regulatory compliance

For far too long, the crypto space has been left with too few regulations. However, things are changing on the stablecoin front. In light of recent developments, the U.S. GENIUS Act will likely become the go-to reference document for stablecoin issuance. Already, the Act details guidelines to promote stablecoin trust and sustainability like:

• Detailing who can issue stablecoins

• Clearly stating reserve backing requirements and disclosures for optimal transparency

• Customer protection and token redemption rights

• Risk management requirements

• Compliance obligations, and many more.

I believe that this is just the start. While many governments globally may not “copy pasta” the GENIUS Act, it will likely serve as a great starting reference point for other countries to draw up stalecoin regulations of their own. It is necessary to mention that countries like Switzerland and Japan already have operational guidelines for stablecoin issuance, risk control, and redemption11.

Since these regulations are designed to promote transparency, trust, and user safety, it should go without saying that compliance of a stablecoin to one of these is non-negotiable. That said, remember that there will be some differences between these regulations. So it is important to identify what legislation a stablecoin is subject to so you can accurately determine how best to keep yourself safe.

This could also be used as a trust index since stablecoins that are operational in multiple countries will have been required to meet the regulatory standards of those countries. So the more countries a stablecoin is legally used as a medium of exchange, the higher its trust “coefficient” and vice versa (PS. this is a personal take so no need to agree or disagree. yunno).

5. Smart contract safety

The operations of a stablecoin are literally governed (either partially or completely) by smart contracts. In fact, the very safety of your liquidity depends on the quality of the stablecoin’s smart contract. I said all of that to say this: If a stablecoin hasn’t been audited by a reputable firm like OpenZeppelin, Consensys, or CertiK, I strongly recommend you stay away. Alchemy has compiled a list of top blockchain auditing companies so I’ll just plug that here.

Be aware that smart contract auditing by itself is not a statement of trust in a stablecoin’s overall quality. It just means that as far as the “current” smart contract is concerned, you’re not likely to get blindsided. I highlight “current” because tokens switch smart contracts all the time (it’s not a new thing) so you definitely want to consider that.

Final thoughts

As I mentioned earlier, I do believe that there are far more components to consider when trying to define what a good stablecoin is. However, since a lot of these components are subjective, it will be challenging to accurately represent them all. That said, the 5 factors highlighted above should provide a solid starting point you can use to determine what a good stablecoin is to you. I know what I look out for in a good stablecoin; how about you?

1. https://www.reuters.com/sustainability/boards-policy-regulation/us-senate-passes-stablecoin-bill-milestone-crypto-industry-2025-06-17/

2. https://www.cnbc.com/2025/06/17/genius-stablecoin-bill-crypto.html

3. https://app.rwa.xyz/stablecoins

4. https://www.reuters.com/technology/stablecoin-issuer-circle-raises-105-billion-upsized-us-ipo-2025-06-04/

5. https://www.chainalysis.com/blog/stablecoins-most-popular-asset/

6. https://www.circle.com/usdc

7. https://www.paxos.com/pax-gold

8. https://www.circle.com/pressroom/circle-announces-acquisition-of-hashnote-and-usyc-tokenized-money-market-fund-alongside-strategic-partnership-with-global-trading-firm-drw

9. https://www.chainalysis.com/blog/how-terrausd-collapsed/

10. https://www.forbes.com/sites/ronshevlin/2025/06/22/americans-will-put-money-in-amazon-and-walmart-stablecoins/

11. https://www.brookings.edu/articles/what-are-stablecoins-and-how-are-they-regulated/#:~:text=Many%20foreign%20governments%20have%20enacted,for%20further%20development%20and%20implementation

Other PoS blockchains like Ethereum, Cosmos, Polkadot, and Tezos have already adopted “Slashing” as a mechanism for punishing validators that engage in these behaviors2. With the release of the SIMD 0204 proposal, Solana takes its first step towards implementing this deterrent to malicious validator activity.

This article takes a detailed look at the SIMD 0204 proposal, explaining what it means, who it affects and its potential impact on Solana’s current economics.

What is SIMD 0204 about?

SIMD 0204 is also called the Slashable Event Verification proposal. It is a proposal that is aimed at introducing a program that verifies and logs proofs that a Solana validator has breached the rules and committed a slashable offense3. It is necessary to point out that SIMD 0204 is not exactly a new concept in Solana, since it was originally created and proposed by Anza on November 26th, 2024. However, some updates have been made to the initial proposal before its re-release last week.

The above definition raises several crucial questions that must be answered to achieve a rounded understanding of what SIMD 0204 is and how it affects Solana. These questions include:

• What are Validators, and what do they do?

• What is Slashing?

• What are Slashable Events?

The following sections dive into the core of each of these questions, detailing what they mean and why they are important. First up, what are validators?

What Are Validators?

Validators on Solana are nodes that participate in the consensus process by validating transactions and voting on block proposals, helping to maintain the security and integrity of the blockchain4. In exchange for their services, validators get rewarded with vote credits. Here, it is important to mention that a validator ONLY earns vote credits if it votes correctly, that is, if it votes for a block that ends up getting accepted by the network.

These vote credits are very important because they serve several purposes. They are used to:

1. Evaluate reward distribution (determine what percentage of the blockchain’s inflation the validator earns for its stakers as economic rewards)

2. Judge a validator’s activity, and

3. Determine a validator’s eligibility for the Solana Foundation’s Delegation Program.

Importance of Solana vote credits

The Solana Foundation Delegation Program is an initiative designed to support network validators whereby a validator receives a delegation from a pool of tokens the Solana Foundation owns. However, before a validator becomes eligible for this initiative, they have to first meet a predetermined set of qualifications known as the Delegation Criteria. The Delegation Program is set up such that each eligible validator receives a stake from the Solana Foundation that’s equal to their own stake in the blockchain5. Delegation plays a very important role in validator functioning because the more tokens a validator has delegated to it, the more often it is chosen to write new transactions to the blockchain ledger. Since validators earn rewards for writing new transactions to the ledger, an increase in delegated tokens automatically results in an increase in rewards earned (both for validators and their delegators)12.

Solana validators carry out a number of different functions, like transaction validation, maintaining the blockchain’s ledger state, boosting security and decentralization, and earning and distributing rewards. However, their primary role in the blockchain involves producing and voting on blocks6.

Types of validators

Currently, Solana has two major types of validators. They include:

1. Consensus Validators: These are the core validators of the blockchain that are responsible for voting on blocks, validating transactions, and maintaining ledger consistency.

2. Remote Procedure Call (RPC) Validators: RPC Validators are technically not validators in the sense that they do not have any tokens staked on the network. As such, they cannot participate in transaction confirmation or block consensus voting operations. Instead, their role primarily lies in data provision and the inclusion of transactions submitted by RPC node users in blocks7.

For the sake of this article’s exploration of what SIMD 0204 is and how it affects Solana’s economics, the term “Validator” will primarily refer to “Consensus Validators” described above. Currently, Solana has 1,212 validators on mainnet with a Current Superminority rating of 204. The term “Current Superminority” here means that the top 20 validators on Solana control over 33.3% of stake. This is an important highlight because it speaks to Solana’s decentralization. Solana runs on a Byzantine Fault Tolerant (BFT) consensus model, which provides coverage for up to ⅓ (or 33.3%) faulty/malicious validators. As such, since the 20 Superminority validators control over 33.3% of stake, it means they potentially have the power to disrupt the network8. Read more about the BFT consensus here. This essentially means that the higher the Superminority Number, the better decentralized Solana is.

At first glance, it would appear that the obvious solution to improving Solana’s decentralization is to have more validators. However, the situation is a lot more complex than that. According to a research by Bitget, the annual cost for running a Solana validator can be as high as $60,000. Meanwhile, the average staking rewards for each validator only amount to about $18,3709. Note that this calculation considers other contributing income sources like MEV commission revenue and Delegated Stake Revenue in addition to the Block Reward Revenue.

Source: Bitget

Since MEV rewards and inflation income are more or less fixed, the only feasible way for Solana validators to increase their income is to ramp up the amount of $SOL tokens staked on it. Bitget estimates that validators need to have a minimum of 32,300 staked tokens to be profitable yearly. However, according to this Dune Dashboard, only 29% of current Solana validators actually have over 32,300 SOL tokens staked. This suggests that up to 71% of current validators on Solana are operating at a loss.

Source: Dune

These figures become even more important when you consider the fact that validator operation is actually supposed to be a business model. As such, if validator operators are unable to keep their businesses afloat via normal operations, it increases the tendency for smaller validators (based on tokens staked) to cease operating or explore other means of raising revenue, some of which may not be beneficial to blockchain health.

On one hand, it is understandable that validator operators that are unable to stay afloat via normal acceptable measures would seek alternate means of revenue generation. On the other hand, validators engaging in unhealthy behaviors for the purpose of maximizing revenue generation will prove to be disastrous if left unchecked. That’s where SIMD 0204 and Slashing come in.

What is Slashing?

Consensys defines slashing as the process of penalizing a validator for misbehaving2. In other words, it is a penalty mechanism used to discourage bad validator behavior, and it functions by attaching punishments to certain dishonest or negligent activities by validators. Slashing is unique to PoS blockchains10. In some PoS blockchains (Like Celestia), “Slashing” is also referred to as “Jailing.11”

When a validator gets slashed, they end up losing some or all of their staked tokens. However, it is important to mention that in some cases, the punishments for slashing go beyond just validators to affect stakers too. In some PoS blockchains (e.g. Celestia), delegators also have a percentage of their delegated funds slashed as part of validator punishment. This already raises a lot of significant questions, especially as to the fairness of such a mechanism that punishes delegators for the bad acting of validators, but this point will be explored in depth in the coming sections of this post.

Examples of slashable activities include the following:

• Double signing and voting activities –validators propose, sign, and attest two different blocks for the same slot in order to increase their chances of a winning vote.

• Liveness faults –validators are expected to keep nodes functioning and participate in consensus at all times. When a validator fails to participate in consensus for a prolonged period, they get slashed.

At this point, it is necessary to point out that while other PoS blockchains like Ethereum, Cosmos, and Polkadot have all implemented slashing to discourage bad acting from validators, Solana has not. However, this could be changing soon since SIMD 0204 lays down the foundational building blocks for this to happen. Note that Solana not having implemented slashing yet doesn’t mean that there are no existing mechanisms for validator punishment.

In the earlier parts of the article, it was proven that validators need to maintain a balance of at least 32,300 delegated $SOL tokens in order to remain profitable. However, amassing such a high volume of liquidity from external sources is often nearly impossible for Solana validators. This is precisely why the Solana Foundation’s Delegation Program exists (to subsidise the cost of running nodes on Solana for validators). Whenever a validator with tokens from the Solana Foundation delegated to it is discovered to be operating maliciously, punishments could involve the withdrawal of the delegated stake, effectively rendering the validator non-competitive.

For example, in June 2024, Solana Foundation removed several validators from its delegation program after it was discovered they had been carrying out sandwich attacks against users in an effort to secure better prices for themselves at the expense of retail traders13. A sandwich attack is a form of exploitation where the attacker manipulates the price of an asset (by front-running and back-running trades) to profit from a victim's transaction (or more specifically, the price difference) while the victim has to deal with inflated transaction costs.

Source: Bein Crypto

Here’s another example: In 2023, it was noticed that validators on Solana were deliberately lagging their votes in order to be sure they picked winning blocks. Unfortunately, these vote-lagging activities prolonged the time it took for consensus to be achieved, ultimately resulting in slower blockchain speeds. SIMD-0033 was proposed to introduce the concept of Timely Vote Credits (TVC) in order to fix this problem. Essentially, the rationale was to reward validators who vote faster with more vote credits than those with higher latency levels14.

From the above, it is clear that blockchains have to take an active stance towards discouraging malicious activity from validators. If these activities go unchecked, they could quite possibly lead to a severe disruption of blockchain activities. In November 2023, Bitcoin Suisse –a staking service for institutional clients had almost 100 validators slashed for trying to publish incorrect data to the blockchain. The total loss is estimated to be close to $200,00015. Meanwhile, since Ethereum introduced slashing in 2020, validators have been slashed over 470 times16. This number could be higher, considering that over 10 million blocks have been produced on Ethereum between 2020 and now (Ethereum introduced slashing in 2020). As such, statistics suggest that slashing is a very effective way to stifle bad acting from validators. However, the question is, since slashing is so effective, why has it not been implemented on Solana yet?

The Problem With Slashing On Solana

At first glance, it appears there’s little to slashing beyond just punishing validators for engaging in malicious behavior. However, upon closer examination, several problems become visible. These include:

• Can the slashing mechanism distinguish between innocent mistakes and malicious behaviors?

Validators may experience hardware faults, software bugs, or honest misconfigurations. Automatically penalizing these as if they were attacks risks discouraging participation or over-penalizing contributors acting in good faith.

• How does a validator's getting slashed affect stakers who have delegated to them?

Slashing not only hurts the validator but also those who have delegated stake to them. This introduces a layer of risk for stakers, who may be penalized for mistakes they had no control over —potentially reducing incentives to delegate at all. This could, in turn, have a significant impact on blockchain security.

• How does slashing affect blockchain latency?

Solana’s high-throughput design relies on fast consensus with aggressive optimizations. Introducing a slashing mechanism requires definitive proof of malicious behavior, and this slows things down when safety violations occur. The network must pause, resolve inconsistencies, and restore consensus before continuing, leading to significant latency spikes.

The goal with slashing on Solana is to maintain low latency while ensuring validators are ONLY punished for malicious acts and not routine errors17. Based on the problems outlined above, it becomes clear that for slashing to be fairly and effectively implemented on Solana, one of the most important things that has to be addressed is the accurate identification of slashable events. This is where SIMD 0204 comes into play.

SIMD 0204: A Closer Look

The SIMD 0204 proposal is directly aimed at creating an enshrined on-chain program to verify proofs that a validator committed a slashable infraction. “Enshrined on-chain program” here means that the SIMD 0204 program will not be a user-deployed smart contract. Instead, it will function as a core component of the Solana blockchain itself (just like how stake and vote programs operate)18. Note that SIMD 0204 DOES NOT make any suggestions as to what punishments erring validators should serve. Instead, it simply tracks and records these infractions, creating reports on-chain for use in future SIMD.

That said, I should mention that the earlier SIMD 0204 proposal by Anza actually specified logarithmic stake slashing as a punishment for erring validators, but in this more recent update, that has been removed. It is my expectation that all talk on specific validator punishments will be centered around future SIMDs. With this, it becomes easier to see why SIMD 0204 is important to the Solana ecosystem. It serves as the foundational building block for the implementation of slashing on Solana. It becomes even more important when you consider that other proposals like SIMD-0212 will directly feed off this one to determine operational specifics.

How SIMD 0204 Works

SIMD 0204 introduces a new feature flag, “create_slashing_program.” When this feature flag is turned on, three important things happen:

1. A new slashing program is deployed on-chain at a fixed address “S1ashing11111111111111111111111111111111111.”

2. The code is loaded from a buffer account (S1asHs4je6wPb2kWiHqNNdpNRiDaBEDQyfyCThhsrgv) and copied into a program data account.

3. Then the slashing program is made immutable by setting its upgrade authority to “none.”

Once the create_slashing_program is active, it has two instructions:

1. DuplicateBlockProof –which allows it to log evidence that a validator has committed a slashable offence. In the event that the proof is found to be valid, a “report_account” is created to store the proof, and then a “system_program_account” creates the violation report for valid proofs.

Note that proofs will ONLY be recorded as valid if shreds are observed to contradict in such a way that it qualifies as a slashing offence. “Shreds” here refers to actual proof data of wrongdoing.

2. CloseViolationReport –when a validator is caught committing a slashable offense, the reporter has to fund the PDA account (report_account) to submit proof and metadata of the violation and keep the report active. Once the proof has been processed,CloseViolationReport allows the reporter to close the PDA account and reclaim their lamports.

Note that there is a specific wait period before CloseViolationReport can be enforced. This is to prevent reports from being closed too early. The specific wait time is for 3 epochs.

Mindmap visualizing how SIMD 0204 operates

Key Points To Consider

1. Validator Identity: Currently, when a validator is reported, the slashing report stores the validator’s node public key, which is essentially the identity of the machine that produced the blocks. However, violations can be “vote types” and “non-vote types”. SIMD 0204 suggests that in future updates, violations that involve votes will instead lead to the report storing the vote account’s public key instead of that of the node. This directly plays into the work being done in SIMD 0108 that aims to create a link between a validator’s “node_pubkey” and vote accounts. This will, in turn, empower the slashing system to be able to accurately track and record all violations.

2. Slashable Event Logging Impact: SIMD 0204 will be a very effective tool for logging known validator infractions like vote lagging, sandwich attacks and so on. However, beyond that, it also provides the perfect window to detect other lesser-known violations that may be affecting blockchain health. With these detailed logs, it becomes easier to identify and punish violations in real time instead of retrospectively.

   SIMD 0204 also serves as a huge step forward in distinguishing deliberate malicious validator behavior from accidental occurrences that occur as a result of factors like validator device malfunction, and so on. This is important because it helps to ensure slashing is both fair and effective, preventing potential validators from getting discouraged due to fears of being unfairly punished for actions beyond their control.

3. Non-backwards Compatibility: SIMD 0204 is not backwards-compatible. This means that if it is successfully implemented, there will have to be a major upgrade of the validator software to ensure they are able to function properly. Not upgrading will lead to existing programs, tools, and workflows “breaking” or behaving incorrectly. The point of consideration here is how long will a potential upgrade take and what impact it will have on Solana’s blockchain activity.

Economic Considerations of SIMD 0204

At first glance, it appears that SIMD 0204 is a proposal that chiefly affects validators. However, upon digging deeper, it becomes clearer that the impact extends well beyond just validators to include delegators or stakers. In other PoS chains like Celo Protocol and Ethereum, punishment for validators centers around slashing or seizing a portion of their stakes19, 2.

However, it is important to point out that when validators get slashed, a portion or percentage of the validator’s delegated balance is what gets slashed, not specifically staked funds owned by the validator itself. This means that stakers share in the risks of a validator misbehaving. It is my opinion that you could make a case for this being a fair punishment since stakers enjoy a share of the rewards if a validator misbehaves and is not detected. On the flip side, it is necessary to point out that stakers do not really appear to have any control over the activities of validators. As such, punishing them for something they have little to no control over would appear harsh, and it could actually disincentivise potential stakers from participating in ecosystem activities. A reduction in tokens staked will lead to reduced decentralization since smaller validators are likely to become unprofitable and cease operations to conserve liquidity.

It is important that any SIMD building on data provided by SIMD 0204 (like SIMD 0212) tailors slashing punishments such that they are limited to validators actually responsible for these malicious actions, instead of the scorch-earth approach that exists with other blockchains. It is also important that these advancements are able to accurately distinguish between malicious activity and accidental malfunctions to prevent validators from getting unduly punished.

Possible Areas For Future Research

1. The incentive structure for reporters and how they fit into Solana’s slashing verification activities

2. The feasibility of isolating validator risks from delegator risks to maintain staker security

3. Alternative validator punishments to discourage malicious behavior aside from stake slashing

4. The link between validator profitability and malicious validator activity on Solana

References

1. https://docs.celo.org/what-is-celo/about-celo-l1/protocol/pos/penalties

2. https://consensys.io/blog/understanding-slashing-in-ethereum-staking-its-importance-and-consequences

3. https://github.com/solana-foundation/solana-improvement-documents/blame/main/proposals/0204-slashable-event-verification.md

4. https://solana.com/validators#what-s-the-foundation-delegation-program

5. https://solana.org/delegation-criteria#vote-credits

6. https://docs.anza.xyz/what-is-a-validator

7. https://docs.anza.xyz/faq

8. https://arxiv.org/html/2504.16267v1

9. https://www.bitgetapp.com/news/detail/12560604129107

10. https://www.ledger.com/academy/topics/blockchain/what-is-slashing

11. https://docs.celestia.org/how-to-guides/celestia-app-slashing

12. https://solana.com/docs/references/staking

13. https://beincrypto.com/solana-punishes-network-validators-for-sandwich-attacks/

14. https://figment.io/insights/solanas-timely-vote-credits-reduce-vote-latency/

15. https://www.dlnews.com/articles/defi/ethereum-stakers-fearful-of-getting-slashed/

16. https://beaconcha.in/validators/slashings

17. https://docs.anza.xyz/proposals/optimistic-confirmation-and-slashing#slashing-roadmap

18. https://dev.to/lordghostx/simd-0204-building-the-foundation-for-slashing-on-solana-1lml#:~:text=This%20program%20is%20enshrined%2C%20meaning,performs%20a%20series%20of%20checks:

19. https://crypto.com/glossary/slashing/