Anyone that has been in the crypto space for a while, or dabbling with blockchain technology and cryptocurrencies, has heard at some point or another about crypto vesting.
Vesting as a concept might even sound familiar, as it also exists in traditional finance. It's a term used to express the legal right to a current or future payment, asset, or benefit, often from the employer. It is frequently used to describe retirement plan benefits or pension programs. However, within the blockchain ecosystem, vesting has a slightly different meaning.
Simply put, crypto vesting shows how the tokens of a specific crypto project ( for example, the play-to-earn crypto gamesyou love) are released into circulation. We will break down the process for you step by step.
What is a token?
Let's remember what tokens are. Crypto tokens or crypto coins are digital assets considered a form of digital currency based on blockchain tech.
The expansion of this sector in recent years has resulted in the creation of several types of digital tokens that serve as both a means of exchange and a store of value. Each digital currency has unique qualities, like the mining difficulty level, the total market cap, or if a total token supply exists.
The quantity of tokens in circulation after the Initial Coin Offering (ICO) has ended is known as the total supply. Supply and demand, market sentiments, and news or events usually influence the value of these tokens. Crypto investors put their money into different projects pertaining to the crypto world for the chance to profit from high volatility, access to lucrative marketplaces, and the opportunity to diversify their investment portfolio.
What is token/ crypto vesting?
Crypto vesting represents the allocation of a certain percentage of tokens from the total supply to early investors, project developers, and team members before the Initial Coin Offering or the Initial DEX Offering.
The tokens are transferred to these primary parties involved after a specific period of time known as the vesting period.
Vesting period explained
The vesting period, also known as the token lockup period, is a period during which tokens issued at the pre-sale ICO stage and distributed as incentives to partners, early investors, and project team members are not sold for a particular period of time.
The project usually announces a vesting schedule to distribute these tokens gradually over a certain time. To keep a healthy token economy, any crypto startup knows they have to keep most of the tokens for investors and not release them all on the market. The team can stop the value of its token from dropping by locking up tokens. It also prevents team members from selling their tokens immediately once the trade begins, thereby protecting the holders' interests.
How does crypto vesting work?
Crypto vesting makes use of smart contracts to transfer ownership of tokens when external criteria are satisfied, such as the duration of work on the project or the fulfillment of specific phases within the project. Furthermore, the crypto vesting period can be tailored to the founding team's preferences. Depending on how the project developers create the release schedule, it can take six months or sixty.
What is a vesting schedule?
So-called "vesting schedules," or the schedule by which previously generated tokens are placed into circulation, typically have an impact on the supply of most new cryptocurrencies and tokens. Only a small portion of the total amount of tokens generally is in circulation at any given time. Most of the time, the remaining crypto is vested or somehow locked.
Early investors and team members will often be the two main groups subject to crypto vesting schedules. Investors may be split up into several groups, each of which may have distinct vesting periods. From earliest to latest participants, the most frequent investor tiers in token sales are often pre-seed, seed, private sale, pre-sale, and public sales (e.g., ICO, IEO, or IDO).
Although they are subject to a stricter crypto vesting schedule, earlier potential investors typically get a better price. While investors often pay for their tokens, team members and advisers usually receive a free allocation that must be vested. The team vesting schedule often has the longest cliff and toughest vesting terms, with a typical divesting period of one to five years. This ensures the team is incentivized to maintain the related platform or product behind their vested tokens.
Token vesting schedule types
There are three types of token vesting schedules, and we're about to check them out one by one:
Linear vesting schedule
In the linear vesting schedule, the vested tokens get distributed proportionally during the vesting period. Basically, a certain number of tokens are allocated to the vested parties involved at regular intervals during the vesting period.
For example, if 10% of the tokens are locked every three months for a total vesting period of nine months, the vested party will receive the tokens in equal ratios. This vesting schedule is referred to as a "linear" technique.
Graded vesting schedule
Each phase in these graded vesting schedules has a variable token release percentage. Basically, it can be tailored to each project separately based on the requirements of the interested parties. For instance, 25% must be issued within the first six months, 10% over the following three, and 25% within the following four.
Cliff vesting schedule
When cliff vesting schedules are used, there are no token releases. This method uses extended time frames in which one cannot pull out his funds, or they will lose all rights to the vested tokens.
Let's imagine the cliff vesting process lasts a certain period, like three months. During this specific period, no released tokens will be available. After the cliff period ends, the tokens are released, and investors receive them either in a linear or graded method.
Crypto vesting advantages
Locking up tokens brings many advantages to every party involved: the management team, the project development team, any early investor, or the general retail investors. Here are a few benefits:
Lowers market manipulation
Token vesting can limit market manipulation. Since the project's tokens are locked, no early investor or team member can flood the market with a high number of tokens as soon as the crowdfunding period is over.
As such, there will be no large price fluctuations as soon as the crypto launches.
Allows project team members to develop the product completely
Locking up tokens gives the project development team enough time to create and finetune a successful project and product. As a result, it allows the team members to create a winning strategy and stick with it as the project develops. It also ensures that milestones are reached and that the product's delivery runs smoothly.
Keeps market fluctuations in check
When there's an Initial coin offering ICO, token holders will want to sell. This fills the market with tokens, lowering the token's value and the project itself. Vesting ensures that the chance to sell for these whales only arises after a particular time has passed. Otherwise, they could easily create market supply fluctuations and generate selling pressure.
Offers token stability
Token vesting can greatly increase the stability of these coins by giving project team members a stake in preserving their value. In traditional finance, companies offer equity to employees, using vesting to delay the ownership and use of the assets. In the crypto space, vesting has a similar effect, limiting the team member's ability to sell their tokens before they have vested.
Shows loyalty and commitment to the project
A crypto project that uses smart contracts to lock tokens during a crypto vesting period, eseentially shows the world that it is commited to the success of the project. As a result, the program may attract a large number of investors. Developers will be encouraged to continue improving and innovating their product if there is an ongoing financial interest in the project. A better product equals more value for their money.
No rug pull risks involved
Pump and dumps and rug pulls are real threats in the current crypto environment, and many early investors and public sale participants are left high and dry in such schemes. By locking a certain percentage of vested tokens, the founders ensure potential investors they are committed to putting in the work to make the project successful, as the coins will be released at set intervals and in equal parts during the crypto vesting schedule.
Great crypto investment opportunity
With crypto vesting, you can invest in cryptocurrencies while holding onto your assets until you sell or trade them. You become an early investor eligible for vested tokens if you participate in the ICO of a coin you think has potential. You can later sell these digital assets to receive a substantial return on your investment.
Crypto vesting is a crucial part of any crypto project, as it protects investors from price volatility, reduces the risk of rug pulls and ensures a crypto startup's long-term stability and viability.
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