Rewards have been an intrinsic part of the crypto landscape since its inception. From Bitcoin miners to Ethereum validators, rewards from Proof-of-Work (PoW) to Proof-of-Stake (PoS) and Delegated-Proof-of-Stake (DPoS), rewards are the true backbone of blockchain.
Although network participants have long played a crucial role in maintaining security on various blockchains, the validator economy has mutated quite considerably in recent years.
In PoS systems like Ethereum, validators are selected to create new blocks and validate transactions based on the amount of cryptocurrency they stake as collateral. However, the arrival of innovative new projects and protocols has given birth to a sophisticated ecosystem that is fundamentally altering how we think about blockchain infrastructure and investment.
In this article, we will discuss all about the Validator Economy and how it has evolved in the past few years.
What is the Validator Economy?
The validator economy refers to the growing industry surrounding the role of validators in blockchain networks. It encompasses not just the act of validating transactions and securing networks, but also the complex ecosystem of Actively Validated Services and (re)staking tools that have been developed around this core function.
Evolution of Validator Economy
In the early stages of PoS and DPoS networks, the validator economy was somewhat basic: individual token holders or small operations would run validator nodes, locking up their tokens to earn rewards. But as the value and complexity of PoS networks grew, so did the barriers to entry for individual validators, much in the way solo Bitcoin miners were crowded out by powerful mining conglomerates and data centres.
The rise of professional validator services and staking-as-a-service providers was, in hindsight, inevitable. With resource-rich companies offering secure, high-uptime validation services, token-holders were free to delegate their stakes and earn rewards without having to actually burden themselves with the technical overhead of running a node.
Arrival of Lido and EigenLayer
The evolution of the validator economy did not stop there; liquid staking solutions like Lido promptly arrived, giving users the chance to stake their tokens while receiving a liquid derivative token in return, which could then be deployed in other DeFi applications to generate extra rewards. This innovation significantly increased capital efficiency in the ecosystem.
One of the biggest and most transformative developments in the validator economy has been the arrival of restaking protocols, with EigenLayer leading the way. EigenLayer, which today has over $17.6 billion TVL, introduced a paradigm shift by enabling Ethereum validators to “restake” their ETH, effectively using the same collateral to secure multiple third-party protocols simultaneously. Despite its mainnet only launching in April, it is currently the second largest DeFi protocol after Lido.
While much of the buzz around EigenLayer has concerned its ability to generate multiple revenue streams from one stake, just as consequential is the fact that protocols can leverage Ethereum’s security without building their own validator set from scratch.
From Staking to Distributed Native Restaking
The validator economy does not just encompass staking and restaking protocols but also validator monitoring and analytics platforms like Beaconchain, slashing protection services, staking pools, and validator insurance products, innovations that make the crypto-economy more capital-efficient and secure. No wonder the number of Ethereum validators recently crossed one million.
Elsewhere, ETH staking networks like SSV are enabling what it calls Distributed Native Restaking. Leveraging its own Distributed Validator Technology (DVT), SSV provides a decentralized validator layer to facilitate the splitting/distributing of a validator key into multiple KeyShares. With DVT, an Ethereum validator can be run across multiple non-trusting nodes while the KeyShares can be securely stored offline. Native restaking is simply a matter of creating an Eigenpod and setting the validator’s withdrawal credentials to the pod address to earn staking points.
The SSV team points out that the benefits of Distributed Native Restaking flow in all directions: stakers get to choose from over 200 permissionless operators, developers get to join an expanding ecosystem, while the Ethereum base layer benefits from superior levels of decentralization.
Conclusion
The evolution from simple consensus mechanisms to complex ecosystems that generate yield while simultaneously boosting security underlines just how far the crypto space has come. As the economy continues to mature, expect to witness developments that push the boundaries of what’s possible in decentralized networks even further.
