DeFi
How the validator economy is reshaping DeFi
Rewards have been an integral part of the crypto landscape since its inception. From Bitcoin miners to Ethereum validators, from Proof-of-Work (PoW) rewards to Proof-of-Stake (PoS) and Delegated Proof-of-Stake (DPoS), rewards are the true backbone of the blockchain.
Although network participants have long played a crucial role in maintaining security on various blockchains, the validator economy has mutated significantly 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. However, the arrival of new innovative projects and protocols has given rise to a sophisticated ecosystem that is fundamentally changing the way we think about blockchain infrastructure and investment.
In this article, we will discuss everything related to the validator economy and how it has evolved over the past few years.
What is validator economics?
The validator economy refers to the growing industry around the role of validators in blockchain networks. It encompasses not only 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 essential function.
Evolution of the validator economy
In the early days of PoS and DPoS networks, the economics of validators were fairly basic: individual token holders or small operations ran validator nodes, locking up their tokens to earn rewards. But as the value and complexity of PoS networks have increased, so have the barriers to entry for individual validators, in the same way that solo Bitcoin miners have been ousted by powerful mining conglomerates and data centers.
The rise of professional validation services and staking-as-a-service providers was, in hindsight, inevitable. With resource-rich companies offering secure, high-availability validation services, token holders were free to delegate their stakes and earn rewards without the hassle of 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 Pool quickly arrived, offering users the ability to stake their tokens while receiving a liquid derivative token in return, which could then be deployed in other DeFi applications to generate additional rewards. This innovation has significantly increased capital efficiency in the ecosystem.
One of the most important and transformative developments in the validator economy has been the arrival of restructuring protocols, with Clean diaper leading the way. EigenLayer, which now has over $17.6 billion in TVL, introduced a paradigm shift by allowing Ethereum validators to “re-stake” their ETH, effectively using the same collateral to secure multiple third-party protocols simultaneously. Although its mainnet only launched in April, it is currently the second-largest DeFi protocol after Lido.
While much of the buzz around EigenLayer has been about its ability to generate multiple revenue streams from a single stake, the fact that protocols can take advantage of Ethereum’s security without creating their own set of validators from scratch is equally important.
From staking to distributed native restaking
The validator economy is not limited to staking and re-staking protocols, but also validator monitoring and analytics platforms like Beaconchain, slash protection services, staking pools, and validator insurance products—innovations that are making the crypto economy more capital-efficient and secure. It’s no wonder that the number of Ethereum validators recently surpassed 1 million.
Elsewhere, ETH staking networks like SSV enable what he calls distributed native recovery. Leveraging its own Distributed Validation Technology (DVT), SSV provides a decentralized validation layer to facilitate splitting/distributing a validation key into multiple KeyShares. With DVT, an Ethereum validator can be run on multiple untrusted nodes while KeyShares can be stored securely offline. Native restore simply involves creating an Eigenpod and setting the validator withdrawal credentials to the pod address to earn staking points.
The SSV team points out that the benefits of Distributed Native Resttaking flow in all directions: stakers can choose from over 200 permissionless operators, developers can join a growing ecosystem, while the Ethereum base layer benefits from higher levels of decentralization.
Conclusion
The evolution of simple consensus mechanisms into complex ecosystems that generate yield while enhancing security underscores just how far the crypto space has come. As the economy continues to mature, expect to see developments that push the boundaries of what’s possible in decentralized networks even further.