If you know about the cryptocurrency market, have 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 sustainable longer period.
This article will provide you with the meaning of vesting without forgetting why token vesting is important and its related benefits.
What is vesting in crypto
Vesting in crypto -or token lock-up- is the period during which a specific amount of tokens is 'removed' from circulation. These tokens are gradually 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, vesting crypto 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 Smart contract 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, and then the vested tokens are released accordingly.
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 mentioned 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 vested tokens will come into circulation, typically concerning the token generation event.
Each round is known as a "batch" when an unlock program has multiple rounds. For example, if a user expects to receive 1,000 vested tokens every month - for 12 months after the Token Generation Event - each batch of 1,000 vested 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 or exponentially over time.
An important aspect to remember is that the unlocking of vested 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.
Is vesting good in cryptocurrency?
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.
Benefits of vesting in crypto
Among the most significant benefits of token vesting, we find as follows:
Shields early investors against market swings and price drops;
Reduces market manipulation, eliminating buyers interested in pumps and dumps scams;
Offers token stability reducing the possibility of massive sell-off;
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: with this type of vesting, the tokens are distributed in equal sections over a particular period of time.
Graded vesting: This type of vesting involves a custom sharing schedule, enabling the tokens to be set free steadily over a particular number of years or months.
Cliff vesting: unlike linear vesting, cliff vesting infers a cliff, a period when investors don’t receive any of their locked-up coins. For example, if there is a 9-month cliff period, the token distribution will start after 9 months. The project will follow a linear or graded schedule to distribute the tokens when the cliff period is over.
Here you can learn more about how token vesting works and why you should care about it.
Crypto Vesting drawbacks and risks
Reduced liquidity: During the vesting period, tokens are locked up, reducing their availability in the market. This can lead to reduced liquidity and difficulty in trading the token.
Incentive misalignment: If the vesting schedule is not designed correctly, it can lead to the misalignment of incentives between the project team and investors. For example, if the vesting schedule is too short, team members may be incentivized to focus on short-term gains instead of the long-term success of the project.
Negative market sentiment: If investors perceive the vesting schedule to be too long or too complicated, it can create negative market sentiment, leading to lower demand for the token and a decrease in its value.
Risk of price manipulation: If early investors or team members are holding a large percentage of the token supply, they may have the power to manipulate the token price by selling a large portion of their tokens after the vesting period ends.
Project failure: If the project fails to achieve its objectives or meet the milestones set in the vesting schedule, investors may lose confidence in the project and the value of the token may decline.
It's important to note that these risks are not exclusive to token vesting and can be present in any type of investment or fundraising effort. Therefore, it's crucial to thoroughly evaluate the project and its vesting schedule before investing.
Examples of token vesting
Ethereum
The Ethereum Foundation used a vesting schedule for the initial allocation of ether (ETH) in its crowd sale. The vesting schedule applied to early contributors and developers who received a percentage of the total ETH supply. The tokens were locked up for two years, with 25% of the allocation vesting after one year and the remaining 75% vesting after the second year.
Filecoin
Filecoin is a decentralized storage network that uses token incentives to ensure reliable and efficient storage. Filecoin used a vesting schedule for its private and public token sales. The vesting schedule was designed to align incentives and ensure long-term value creation. Tokens were locked up for 180 days after the sale, with 25% vesting every six months thereafter.
Polkadot
Polkadot is a blockchain interoperability platform that allows different blockchains to communicate with each other. Polkadot's DOT token used a vesting schedule for its public sale. Tokens were locked up for three months after the sale, with 10% vesting immediately and the remaining 90% vesting linearly over two years.
Chainlink
Chainlink is a decentralized oracle network that connects smart contracts to external data sources. Chainlink used a vesting schedule for its team members and advisors. Tokens were locked up for one year, with 25% vesting every six months.
These are just a few examples of token vesting, but many other cryptocurrency projects use vesting schedules to incentivize early investors, team members, and other stakeholders to stay committed to the project for the long term.
Conclusion
After all this information about crypto vesting, you will not miss any important details, 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, crypto crowdsale guide is probably for you.
