What is token vesting?
If you know about the cryptocurrency market, examined the tokenomics of a project or invested in a newly launched cryptocurrency, you probably saw the term "vesting" somewhere. Token vesting is important for most crypto projects’ fundraising efforts and retaining its investors for a sustainably longer period.
This article will provide you with the meaning of vesting without forgetting why token vesting is important and its related benefits.
Meaning and functioning of token vesting
In the crypto world, token vesting -or token lock-up- is the period in which a specific amount of the tokens are “removed” from circulation. These tokens are released over a predetermined time frame, typically stipulated by a token vesting contract.
The time these tokens are locked up is called the crypto vesting period. The locked-up tokens aren’t available for sale during the crypto vesting period.
In simpler terms, crypto vesting is a kind of planning by which previously created tokens are put into circulation.
When a project decides to have a crypto vesting schedule, it develops a digital agreement that establishes the terms and conditions of locking up tokens. The vesting schedule is announced through the project’s resources, such as whitepapers and newsletters.
Two main groups will generally be subject to vesting: early investors and team members.
The token vesting schedule generally includes these phases: pre-seed, seed, private sale, pre-sale and public sale.
Initial participants (the two categories expressed above) generally enter at a more favourable price but are subject to a stricter vesting schedule. This ensures that the team and early investors remain motivated to create value.
Vesting programs generally describe when new tokens will come into circulation, typically concerning the token generation event.
Each round is known as a "tranche" when an unlock program has multiple rounds. For example, if a user expects to receive 1,000 tokens every month - for 12 months after the TGE - each batch of 1,000 tokens will be a tranche. These breakouts can start after a cliff period, a delay before the actual vesting program starts. For example, if a team member has a two-year cliff, the token unlocking program won’t start until two years after TGE. In other cases, you can unlock your tokens linearly, other times exponentially over time. (This means you can claim your share in proportion to the time spent.)
An important aspect to remember is that the unlocking of tokens can often depend on achieving specific objectives or milestones of the roadmap. These could include listing on a reliable centralized exchange (CEX) or onboarding some users. If the team does not achieve these goals, they do not have the right to receive their tokens.
Benefits of crypto vesting
Vesting helps ensure supply grows steadily over time, ideally in line with increasing demand. It also ensures stable and sustainable value growth. It achieves this by ensuring that early investors - team members and consultants - cannot sell all of their tokens to make a quick profit, potentially affecting the project's long-term sustainability.
By controlling the growth rate of current supply, projects can ensure that market capitalization grows in line with its usefulness and adoption. However, it should be noted that a small number of projects use vesting schedules to create an artificially low circulating supply and inflate the project evaluation at will. These projects often have extremely high inflation, which generally impacts subsequent investors.
Among the most significant benefits of token vesting we find as follows:
Shields early investors against market swings and price drops;
Reduces market exploitation, eliminating buyers interested in pumps and dumps scams;
Offers token stability reducing the possibility of massive selling;
Loyalty and commitment to the project.
Types of token vesting
Projects are free to determine how to vest their tokens per their objectives.
Here are the primary forms of crypto vesting schedules:
Linear vesting: in linear vesting, the tokens are distributed in equal sections over a particular period of time.
Graded vesting: This is a custom sharing schedule, enabling the tokens to be set free steadily over a particular number of years or months.
Cliff vesting: unlike the linear vesting o, this form of vesting infers a cliff, a duration when investors don’t receive any of their locked-up coins. The project will follow a linear or graded schedule to distribute the tokens when the cliff duration is complete.
Here you can learn more about how token vesting works and why you should care about it.
After all this information about crypto vesting, you will not miss anything, and you will be more prepared the next time you deal with the documentation of any tokenomics.
If you have a crypto project to launch, this crypto crowdsale guide is probably for you.