TipRouter And The Future Of Solana Economics
How the Jito TipRouter NCN can help maintain alignment between validators and their stakers after SIMD-0096
A large shift is coming to Solana's economic landscape this week that will fundamentally change how validators, stakers, and token holders earn rewards. At the heart of this change lies SIMD-0096, one of the most significant updates to Solana's economic model since its inception. But fear not - the Jito ecosystem has spent years preparing for this evolution, developing solutions that can help maintain alignment between validators and their stakers.
In this post, I'll walk through how Solana economics work for different stakeholders, explain the upcoming SIMD-0096 changes and their implications, and explore how the Jito Tip Distribution Program, the Jito TipRouter NCN, and Jito-Solana changes can help maintain alignment between validators and their stakers.
Solana Economics 101
To understand Solana's economic landscape, we need to explore the four main revenue streams that make up the network's economy: inflation rewards, Jito tips, base fees, and priority fees. Each of these components plays a crucial role in incentivizing different participants in the ecosystem.
Let's start with inflation rewards, which form the foundation of Solana's economic model. While these rewards were traditionally a larger portion of validator and staker revenue, they aren't included in the REV metric. When new SOL tokens are created through inflation, they're distributed to validators and stakers who help secure the network, creating a basic incentive structure that rewards network security contributions. This inflation mechanism was particularly crucial during Solana's early days, helping bootstrap network participation when other revenue streams were minimal. Like many blockchain networks, Solana's inflation follows a predetermined taper curve, gradually decreasing over time as the network matures and other revenue sources grow in importance. There is a recent Solana Improvement Proposal, SIMD-0228, to modify the original inflation schedule.
The second source of revenue for Solana is Jito tips. When users want their transactions processed through MEV infrastructure, they gain access to a sophisticated tipping mechanism with unique advantages that priority fees don’t offer. Unlike traditional priority fees, Jito tips are only paid if the transaction successfully executes, protecting users from losing fees on reverted transactions. These tips can also be dynamically calculated and paid during the transaction's execution itself, enabling precise tipping based on the actual value captured. This is particularly valuable for complex operations like arbitrage or liquidations where execution certainty and timing are crucial. And while regular priority fees include a burn component, Jito tips flow to validators and stakers with established systems for distributing portions to stakers, creating better alignment between network participants. Through these features - conditional payment, execution-time tipping, and direct distribution - Jito tips offer a more efficient and aligned way to incentivize transaction processing on Solana.
Base fees, the third source of Solana revenue, serve a different purpose. Every transaction must pay a base fee and 50% is burned. This burning mechanism helps control network spam while also creating a deflationary pressure on SOL supply when network activity is high. Think of base fees as a "cost of doing business" on Solana – they're not meant to generate revenue for any participant but rather to maintain network health.
Finally, priority fees are at the center of the upcoming SIMD-0096 changes. Currently, when users include priority fees with their transactions to incentivize faster processing, these fees are split evenly – 50% goes to validators who process the transaction, while 50% is burned similar to base fees. This split system was designed to balance validator incentives with broader token holder interests through the deflationary burning mechanism.
SIMD-0096
SIMD-0096 was proposed in December 2023 with a central goal: to better align validator incentives within Solana's economic model. At its core, the proposal advocates for a fundamental change in how priority fees – which account for ~40% of current Solana REV – are distributed. Under the current system, these fees are split evenly: 50% goes to validators as rewards, while the other 50% is burned, effectively benefiting token holders through supply reduction. SIMD-0096 proposes shifting to a model where validators receive 100% of priority fees. The motivation behind this change stems from concerns about the current 50-50 split model.
Proponents argue that the current 50% burn doesn't fully align with validator incentives and can lead to alternative arrangements outside the protocol. For instance, users might negotiate private fee arrangements with validators to circumvent the burn mechanism. While Jito tips serve as an example of out-of-protocol payments, they were created to solve broader MEV challenges beyond just fee distribution.
Detractors of SIMD-0096 raise concerns about removing the priority fee burn mechanism, which burned $330 million worth of SOL in 2024. Under the current system, the 50% burn requirement creates an economic cost that discourages validators from artificially inflating priority fees in their blocks. Without this burn, validators could potentially include high priority fees in their own transactions during their leader slots - essentially paying these fees to themselves. This artificial inflation of fees could lead to wallet software, which often estimates required fees based on recent history, to suggest higher fees than necessary for users.
SIMD-0096 ultimately passed, but it stands as one of the most contentious votes in Solana's governance history. As its activation approaches, new discussions have emerged in the community, particularly focusing on how the change might affect staker economics and broader Solana tokenomics. The clear divide shown in the voting results - with significant "no" votes and abstentions - reflects ongoing concerns about changing such a fundamental economic mechanism.
What About The Stakers?
Understanding how stakers fit into Solana's evolving economic landscape requires examining both their current situation and the path forward. Currently, stakers face an interesting paradox - while they play a crucial role in Solana's delegated proof of stake system by delegating their SOL to validators and enabling them to produce more blocks, they receive surprisingly little direct compensation from the network's revenue streams.
The one notable exception to this pattern has been Jito tips. Through the Jito ecosystem, more than $950M has been generated for both validators and stakers, establishing a precedent for direct revenue sharing. While varying widely across validators, in recent epochs Jito tips have increased the staking rewards by 25-50%.
When it comes to priority fees – a significant source of validator revenue – stakers currently see none of these rewards directly. Some validators have attempted to address this disparity by manually transferring portions of their priority fees to Liquid Staking Tokens (LSTs) they work with. While well-intentioned, this approach creates its own set of challenges. Manual transfers only benefit LST holders, leaving out direct stakers who may comprise a significant portion of a validator's delegation. Additionally, manual transfers lack the transparency and predictability of systematic distribution – they may occur at irregular intervals and with varying amounts, making it difficult for stakers to forecast their expected returns. Transparency on these distributions is also challenging for all parties given the lack of standardization.
This situation has not gone unnoticed by the Solana community and core engineers. SIMD-0123, currently under review, proposes adding protocol-level mechanisms for distributing block rewards to stakers. While this represents a promising long-term solution, its implementation timeline appears to be many months away as it progresses through the review and governance process.
This is where the Jito Tip Distribution Protocol and TipRouter enter the picture. Rather than waiting for protocol-level changes, these tools provide validators and stakers with an immediate path forward.
TipRouter To The Rescue
The Solana ecosystem doesn't need to wait months for a protocol-level solution to emerge. Through the Jito Tip Distribution Protocol and TipRouter, validators already have access to a transparent, decentralized system for sharing rewards with their stakers. The tip distribution program has already proven itself by successfully processing and distributing more than $950 million in tips to date, demonstrating its readiness to handle priority fee distribution as well. TipRouter, which has been audited and is actively being rolled out to decentralize Jito tip distribution on Solana, provides the infrastructure needed to standardize this process across the network.
This standardization is particularly urgent as validators grapple with implementing their own fee-sharing solutions. Without a unified approach, the ecosystem risks fragmenting into a patchwork of incompatible distribution systems, each requiring separate maintenance and monitoring. Some validators have resorted to launching their own single-validator LSTs just to handle fee distribution, while others struggle to develop custom solutions – creating unnecessary complexity and making it difficult for stakers to track their true returns across different validators.
TipRouter solves these challenges by providing a standardized distribution mechanism that works seamlessly with existing ecosystem infrastructure. By routing priority fee distributions through this system, validators gain immediate access to established tracking and reporting tools, including integration with popular APY calculation APIs, staking websites, and StakeNet's comprehensive monitoring capabilities. This is particularly valuable for non-technical validators who might otherwise be disadvantaged by the complexity of building their own distribution systems. Additionally, TipRouter covers all transaction costs associated with the distribution of these fees.
Rather than having each validator solve these technical challenges independently, TipRouter offers a proven solution that brings transparency and consistency to priority fee sharing across the entire ecosystem. Validators can focus on their core operations while providing their stakers with clear, trackable rewards through an established distribution framework.
How Does TipRouter Work
When we originally developed the Tip Distribution Protocol, we anticipated its importance would extend beyond just MEV tips. We recognized early on that Solana's economic model would likely evolve toward more direct staker compensation, and we built our systems accordingly. This foresight is now proving valuable as the ecosystem faces these exact changes.
The Jito TipRouter represents another significant advancement in this infrastructure. As Solana's first restaked Node Consensus Network (NCN), it was purpose-built to decentralize the process of distributing SOL proportionally to each staker. TipRouter is secured by a diverse set of operators, multiple LSTs and JTO, creating a robust security foundation worth more than $193M. While still early, this significant security backing demonstrates the ecosystem's confidence in this approach.
At the heart of TipRouter's operation is a network of node operators who work together to ensure accurate and transparent reward distribution. At the end of each Solana epoch, these operators run distributed open-source software to reach consensus on the correct distribution of rewards, uploading a Merkle root to an on-chain program that handles the actual distribution. This consensus-driven approach makes the entire process verifiable on-chain, eliminating the need for trust in any single entity.
What makes TipRouter particularly powerful is its flexibility. The infrastructure is completely agnostic to the source of SOL being distributed. Whether the rewards come from priority fees, tips, or other sources, the router can handle the distribution with the same level of transparency and efficiency. This adaptability means validators can use this infrastructure to distribute any form of rewards to their stakers, maintaining strong alignment regardless of the reward source.
TipRouter operates with a fee structure designed to sustain the infrastructure while ensuring all participants are properly incentivized. It takes a 3% fee on distributed rewards, split between LST vault operators (0.15%), JTO vault operators (0.15%), and the Jito DAO (2.7%). These operators, in turn, share their portions with their respective stakers, creating aligned incentives throughout the system. Importantly, this 3% fee only applies to the portion of rewards that validators choose to distribute through TipRouter – if a validator decides to keep 70% of their priority fees for themselves and distribute 30% to stakers, the 3% fee is calculated only on that 30% distribution. This means validators maintain complete control over their commission structure and only pay fees on the portion they choose to share with stakers. For example, if a validator earns 100 SOL in priority fees and decides to keep 70 SOL while distributing 30 SOL to stakers, the Router's 3% fee would only amount to 0.9 SOL (3% of 30 SOL), not 3 SOL (3% of the full 100 SOL). This approach ensures the protocol’s sustainability while minimizing the impact on validator economics and maintaining flexibility in reward distribution strategies.
To accelerate the fair and transparent distribution of Solana's growing priority fee revenue, I propose standardizing fee-sharing through the Jito Network's TipRouter. This immediate solution will eliminate the need for fragmented infrastructure, ensure all stakers can participate equally, and provide validators with proven tools for reward distribution while we await protocol-level changes.
Ecosystem Impact
To understand the full impact of implementing TipRouter for priority fee distribution, let's analyze recent network activity and model potential outcomes.
For SOL token holders, the transition to using the TipRouter for priority fee distribution would have no direct economic impact. Whether validators choose to distribute priority fees through TipRouter or not, the token holder economics remain unchanged. After the implementation of SIMD-0096, which removes the 50% burn, SOL token holders no longer benefit from priority fee REV.
While validators would receive the same total amount of priority fees, choosing to distribute a portion to stakers would naturally reduce their direct revenue. Ultimately, each validator will need to evaluate their own economic model and relationship with stakers to determine the right balance for their operation. However, this investment in staker alignment could strengthen their position in the network over time. Validators who share rewards may attract more stake, potentially increasing their total earnings through higher block production and tip volume.
The story becomes more interesting when we look at staker impacts. Over the past month, priority fees have averaged approximately 32k SOL ($8mm) per day. Currently, 50% of these fees are burned while validators receive the other 50%. If validators were to distribute these fees to stakers using TipRouter, it would create a significant new revenue stream for stakers:
Assuming a run-rate of 11M SOL in priority fees per year (slightly below the Jan ‘25 run-rate) and 50% distribution, stakers could see their effective APY increase by 15% (9% to 10.5%). This represents a meaningful improvement in staker economics while maintaining strong validator alignment.
Technical Work
While SIMD-0123 progresses through development, there are two potential paths for implementing priority fee distribution faster: a manual script-based approach or full automation through Jito-Solana. Given the operational complexities involved, the automated approach appears to be the more sustainable solution.
The manual approach provides functionality through a periodic script execution process. This script would calculate the appropriate reward distribution based on elapsed time and commission rates, then transfer the designated amount of block rewards to the validator's tip distribution account. From there, the existing tip distribution program and TipRouter would handle the proportional distribution to stakers. While functional, this approach presents several operational challenges. Carefully tracking all historical reward payments to ensure accuracy, and timing the distribution to occur before epoch boundaries could prove logistically challenging.
A more robust solution would be full automation integrated directly into Jito-Solana. This implementation would introduce a dedicated parameter for block reward commission (though it could potentially leverage the existing MEV commission parameter), and would either integrate directly with block production code or operate as a background service to track accumulated rewards. The system would then handle periodic transfers to the tip distribution account automatically, eliminating the need for manual operator intervention.
One consideration to make: should the block rewards sharing piggyback on the MEV commission or be separate? From a conceptual perspective, priority fees and MEV tips serve essentially the same function - they're both ways for users to incentivize validators to include their transactions. Using the existing MEV commission parameter would require only minimal changes to StakeNet and existing APIs, while introducing a separate parameter would involve more substantial engineering work. If the existing MEV commission parameter is used, validators would need to carefully consider and adjust their commission rates to ensure they maintain profitable operations while sharing rewards with stakers. This gives validators the flexibility to find the right balance between growing their stake through attractive reward sharing and maintaining sustainable economics for their business.
It's important to acknowledge that since these distributions occur outside of the core protocol, neither approach can provide absolute guarantees about reward distribution. However, comprehensive verification tools can be built that will allow stakers to independently confirm the accuracy of their rewards. This transparency is crucial for maintaining trust in the system, especially as we work to standardize commission parameters and establish clear relationships between MEV and priority fee distributions.
Next Steps
This infrastructure will be available to the entire network in the next six weeks, following the completion of engineering and audits for the required changes. We encourage validators to join us in Discord to learn more about implementation details and ask any questions about integrating with the system.
The Solana ecosystem is experiencing unprecedented economic activity, and its continued growth depends on maintaining strong alignment between validators and stakers. I believe TipRouter represents a critical step forward in standardizing reward distribution, providing immediate solutions to pressing challenges while we work toward protocol-level implementations. By adopting this battle-tested infrastructure, validators can strengthen their relationships with stakers, increase rewards for network participants, and help build a more sustainable and transparent economic foundation for Solana's future growth.