For anyone who doesn't know, version.txt is a text file that holds certain details pertaining to the current firmware version installed on your PSP. Some features/functions, like upgrading your firmware, check this file first. Games too... You can edit this file to bypass certain firmware checks in games and demos. So for example, if you're old school running 5.00 GEN or M33 and a game you wish to play requires a later firmware version, you simply edit this file, save it back to flash0 and now that game *may* work.
Frostegater's "verGen" generates this file -- version.txt -- for you as it holds more info than just the firmware version number; verGen also writes said file back to flash0 under /vsh/etc/. Don't worry though -- it's safe ... or should be anyway.