Iceland is part of the EEA, where you accept most the rules of the single market being sent over by a fax machine from Brussels.
But this excludes things such as farming and fishing, the latter of which has been very important for Iceland because the EU has never always got that right in a painful attempt to make all member states equally unhappy, and representation of where those rules are decided (Council, Parliament) or proposed (Commission).
Even outside the EEA, the size of the EU on the continent means European countries who want to do large amounts of frictional-less trading end up importing the EUs rules (e.g. Switzerland, post-Brexit UK) with no say on them.
Being inside offers more effective place to lobby and do horse-trading. Iceland is in position with rather specific interest so they could easily give up many things that don't really matter to them greatly for concessions from others.
Vero powers don't exist anymore on almost anything; but if you're vehemently opposed to something you have no chance to actually stop, it's better to be inside so you can trade your nominal opposition for something, anything.
If you know you're going to lose 10 no matter what, you might as well trade your opposition for something worth 2 or 3, so you lose less.
Vetoes are limited to very specific areas, and are often bypassed already even in those areas (because most practical decisions are actually not taken by the organisms where vetoes exist). Even the Hungarian government, which has stretched the interpretation of such definitions to the most awkward limit over the last decades, in practice falls in line pretty much all the time, using it as a bargain chip to ensure this or that subsidy keeps flowing. It's a desperate strategy anyway: like the Visegrad bloc's actions effectively prompted reforms to reduce their leverage, so will Hungary bring about new ways to further diminish even the current simulacra of veto.
