Staking has stood tall as a significant part of the cryptocurrency industry, providing users with rewards and networks with security. However, with the advent of Validator Extension Tokens (VETs), we stand at the precipice of a new era in staking.
Validator Extension Tokens (VETs) represent a novel concept in the crypto arena. A VET is a tradable token that extends a validator's staking services. When purchased, it allows the buyer to be staked into a specific validator on a specific blockchain. The staking rewards from this validator accumulate into the underlying VET, increasing its value beyond the intrinsic asset value. Think of these as similar to Liquid Staked Derivatives (LSDs), but specific to individual validators. This feature makes VETs a versatile addition to any cryptocurrency exchange or platform.
Imagine a validation business called Best Validator that specializes exclusively in the Cosmos Ecosystem.
Best Validator currently runs a validator node on Cosmos (ATOM), Osmosis (OSMO), Agoric (BLD), and Juno (JUNO).
Best Validator decides they would like to create a VET comprised of the 4 chains that they validate on, so they create an ICS-20 VET under the BEST moniker.
As a result, Best Validator now has a tradable/transferable method to facilitate delegations into their entire validation portfolio via a single transaction.
Referring back to the same Best Validator example, what if Best Validator has a varying active set position on the chains that it validates on?
Let’s say that Best Validator is currently in the top 5% of total delegations on the Cosmos (ATOM) and Agoric (BLD) blockchains, but is in the bottom 5% of total delegations on Osmosis (OSMO) and Juno (JUNO). Best Validator is potentially in danger of being lowered and later removed from the active set on OSMO and JUNO due to the low number of delegations.
To help remedy this, Best Validator decides that they would like to create an ICS-20 VET of these 4 chains under the B4ST moniker. This time, however, instead of equally weighting the asset distribution, Best Validator decides to weigh incoming delegations according to this distribution: ATOM (10%) - BLD (10%) - OSMO (40%) - JUNO (40%)
In this scenario, the majority of delegations (80%) will be staked on the chains that are underperforming for Best Validator, in turn prioritizing those chains and potentially improving active set position while still (although at a smaller proportion) increasing delegations on the already established set(s).
The beauty of VETs lies in their appeal to a wide range of potential investors, from protocol treasuries to retail investors.
1. Protocol Treasuries: Protocol treasuries stand to benefit significantly from investing in VETs. These entities manage funds for blockchain protocols, and their primary focus is often on optimizing returns and ensuring the security of their holdings. VETs offer an avenue to achieve both these objectives. By investing in VETs, protocol treasuries can enhance their return on investment through the staking rewards that accrue into the VETs.
2. Retail Investors: Retail investors can leverage VETs as a mechanism to invest in multiple validators across various chains with a single investment. This ease of investment, coupled with the potential for high yields, makes VETs an attractive proposition for retail investors. Furthermore, the possibility of trading VET tokens on any exchange or platform enhances their liquidity, a critical factor for retail investors.
The flexibility of VETs allows investors to diversify their investment portfolios. They can choose to invest in a single-chain VET or a multi-chain VET, depending on their risk tolerance and investment strategy.
For instance, a single-chain VET focuses on one specific blockchain. This approach might suit investors looking for a targeted investment strategy, focusing on the potential gains from one particular validator on one specific blockchain.
Conversely, a multi-chain VET offers the opportunity to stake across multiple validators on various chains. This diversified approach can offer a buffer against the volatility inherent in the crypto market, spreading risk across various chains while maximizing potential returns.
The potential use cases for VETs are vast. From single-chain to multiple-chain staking, or even derivatives like levered staking tokens, the possibilities are exciting.
Benefits of VETs include predictable returns based on staking rewards, expanded network security by separating staking from a wallet interface, increased validator delegations through additional mediums, and more. VETs can even extend one chain's staking to another ecosystem—for example, introducing ATOM staking to Ethereum.
VETs hold potential applications across all Proof-of-Stake blockchains, such as Cosmos (with its 70+ chains), Ethereum, Polkadot, Solana, Cardano, Polygon, Arbitrum, Avalanche, Tezos, and many others. This presents a broad scope for their usage in the blockchain ecosystem.
In conclusion, Validator Extension Tokens (VETs) represent a significant breakthrough in cryptocurrency staking. By enabling validators to extend their staking services and facilitate delegations through a single, tradable token, VETs offer an exciting new mechanism for validators, exchanges, and investors. Their broad applicability across different blockchains and their potential for improving network security and expanding staking services make VETs an essential element to watch in the evolving world of blockchain technology.
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