- 1 Token vesting requires a fixed timeframe during which investors are prohibited from selling their tokens.
- 2 This measure protects DeFi projects from premature token sales.
Token vesting prohibits premature token sales and benefits the investors to have complete access to their holdings. It is a mechanism where cryptocurrency or tokens are allocated to individuals or entities that may be founders, advisors, or early investors. Then they are allowed to release their holdings gradually over time and not all at once.
It restricts the immediate selling of coins. The tokens bought at pre-sale events are locked in a smart contract. It is the reason why the investor cannot use the complete holding.
The release of the token is decided by the company, which can be different. It may be 10%, 20%, 30% and so on after six months. The period until which the tokens are locked is called lockup time. It creates price stability and maintains an adequate supply of tokens.
How Does Token Vesting Work?
Token vesting works by restricting the sales of tokens for a limited period. That in turn offers benefits like the specified duration for which the token is locked prevents market collapse by controlling token release.
The release process is automated or manual. As the vesting progresses the tokens are gradually available to investors and often divided into segments known as cliffs. The backers acquire tokens at discounted rates through agreements like the Simple Agreement for Future Tokens (SAFT). It can raise the risk of price manipulation by the stakeholders to maintain price stability.
The project developers decide the vesting schedule and the token granting and the details are conveyed to the public and investors through channels, such as press releases, whitepapers, and newsletters. This way it maintains the transparency which is entrusted to anyone in the field. It also shows the commitment and clear roadmap for token release. Projects’ credibility also increases this way.
Benefits of Token Vesting in Project Tokenomics
Maintains the Price of Tokens: It acts as a protection against price fluctuations. The main advantage is that the supply of tokens gets limited and it protects the immediate release of tokens by locking. As a result, investors cannot trade them and the halt of the token prevents the price fluctuations.
It Prevents Dumping: The market stabilizes due to vesting. The traders cannot trade the tokens physically. Hence, the chances of market manipulation by traders are reduced. They cannot perform pump and dump to realize profits.
Token Vesting in Project Tokenomics: Vesting helps avoid dumping, panic selling, and market unraveling by providing visibility and confidence in token supply growth.
Generally, cryptocurrency companies work parallel to traditional vesting methods to balance the market supply of the tokens. The investors do not sell them at once as the companies release the tokens on cliffs. It also maintains consistency with the demand and supply forces.
Enhances Project Development: The vesting is done at the presale events, it facilitates sufficient funds for developers to complete the project. They can enhance the tokenomics by attracting potential investors to their tokens.
The interests of teams and investors are aligned with long-term projects through time-based vesting mechanisms.
Builds Trust Among Tokenholders: By the use of smart contracts in DeFi networks vesting is done in a transparent and automated way. It increases the trust among token holders.
Types of Token Vestings
There are three types of vestings depending on the schedule of vestings.
Linear Vesting: In this type of vesting the duration of the vesting schedule depends on the predetermined time frame. The releases can occur in equal amounts or portions. Hence, there are regular interval token releases over a specified time.
Graded Vesting: This type of vesting involves different release rates within the vesting schedule. The token is released in varying amounts. Over time the tokens could be released in different percentages, gradually increasing the allocation.
Cliff Vesting: This type of vesting starts when an investor meets specific criteria typically after a probationary period. In the initial cliff period, the investor does not have access to any token. The linear or graded vesting schedule commences once they pass the probationary phase. Gradually the investors start receiving tokens as per the vesting schedule.
Challenges Linked with Crypto Vesting
Legal Concerns: The regulatory uncertainties in the developing cryptocurrency ecosystem can affect the enforcement of vesting contracts. Thus, legal concern arises.
Smart Contract Vulnerability: Token holdings could be compromised due to flaws in smart contracts that lead to security breaches. Once the token is unlocked, the liquidity risk is attached to vested tokens and this causes market fluctuations.
Does Token Supply Impact During Token Vesting?
Token Vesting impacts the supply and market dynamics as it maintains the gradual release of tokens. The tokens are not readily available for trading or circulation. It is the reason that until the tokens are fully vested they are not considered the part of available supply. Hence, the circulating supply of the token is reduced in the vesting period.
The market dynamics are affected as the tokens enter the circulating supply when they progressively unlock by schedule. The ecosystem supply-demand balance is thus impacted.
Difference Between Token Vesting and Traditional Vesting
The main difference between token vesting and traditional vesting is administration. Token vesting is done on smart contracts on blockchain whereas transitional vesting has centralized administration.
Token vesting is transparent and trustless whereas traditional vesting has centralized oversight. Cryptocurrency tokens or coins are used in vesting while stock and RSUs are utilized in traditional vesting.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.