Every emerging project needs funds to succeed. In the crypto world, those funds are acquired by minting tokens made available to the public through pre-sale events or Initial Coin Offerings (ICOs). Angel Investors, VCs, private capitals, as well as individuals looking for investment opportunities are given the option to buy those tokens.
The project’s team will use the acquired funds to ensure the successful development of their product. But what would happen if all the investors would decide to sell their tokens at the same time?
This is where the crypto vesting comes into play. Today, we’ll tell you everything you need to know about it.
First things first.
What is crypto vesting?
Crypto vesting is the act of restricting the sale of a token for a predefined period of time. In plainer terms, it is the time an investor must wait until they gain full control over their assets.
Vesting periods are set to prevent investors from selling their assets at once, which would lead to an increased token supply on the market—a move that would lead to a crash in the coin’s price. They also prevent developers from abandoning the project and running away with the funds (these scams are known as rug pulls).
If such a program is set in place, token owners cannot sell their assets before a clearly set date, which makes vesting a controlled way to distribute and release tokens in the pre-sale period.
Fun fact: the term “vesting” comes from the Latin word “vestire”, the act of “dressing.”
Which are the benefits of a token vesting period?
Having a vesting period is advantageous to everyone involved in a crypto project, from the core team to the investors.
It protects early investors against market fluctuations – if investors have their tokens locked up for a predetermined period, they are prevented from selling their assets as soon as the tokens get listed on a centralized or decentralized exchange. Therefore, the risk of having huge market spikes or drops is minimized, the coin enjoys a certain level of scarcity, and its value remains relatively stable. For early investors, that means more time to draw benefits from the product they invested in, by waiting for a boost in the token’s value.
It lowers market manipulation – token lockup weeds out investors interested in so-called “pump and dump” schemes. These types of investors find the idea of waiting for a few months or years until they can sell their tokens unappealing. After all, they wish to create hype around a project in order to boost that token’s value, only to sell their assets as soon as possible. This way, they destabilize the market, tanking the price of the token in the process. Crypto vesting prevents them from accomplishing their goals.
It provides token stability – by preventing a massive selloff of crypto assets, vesting schedules boost the stability of a token’s price. This helps new projects level the popularity of their tokens and boost the public’s confidence in their product.
It gives the team time to develop their product – since these pre-sale events are typically run before a project is fully launched, locking up tokens gives the team the time and funds they need to finish developing their product. The team can also use this time to gain visibility and attract a critical mass of people interested in the product they’re building. During this time, investors can assess how innovative that project is, check its progress, and decide whether they want to keep investing, hold on to their tokens, or exchange them.
It lowers the risk of having a large entity controlling the supply – projects with one or more big investors controlling a large amount of the total token supply (let’s say 25%) face stability risks. If those investors decide to sell their tokens at once, there would be a huge fluctuation in the market due to the increased token supply.
How does crypto vesting work?
Once a project decides to have a vesting schedule, it will create a contract (or a smart contract) establishing the conditions of its token lockup process. The vesting schedule can also be communicated through publicly available resources, such as a whitepaper
, website, newsletters, etc.
Each project is free to decide how long its vesting period will be, as well as how they will release the tokens. Let’s say that a company decides to implement a 24-month vesting schedule. They can release 25% of one’s acquired tokens after 6 months, another 25% after 12 months, followed by another 25% after 18 months, and the last batch of 25% in 24 months. In this case, token owners will gain full control over their assets in 4 biannual payments.
For TOKHIT, we opted for an 18-month vesting schedule
, with 10% of the acquired tokens being released immediately and the rest of 90% released over a period of 18 months, with 6 quarterly payments.
Types of Vesting Schedules
Each project can decide how to vest its tokens, according to its goals. The main types of schedules are:
Linear vesting – this is the simplest way to install a crypto vesting schedule. The tokens are distributed in equal parts over a specified time. For instance, a project might release 25% of the locked tokens every 4 months, for a total of 16 months.
Graded vesting – projects can opt for a custom distribution frequency, having their tokens released gradually over a specific number of months or years. In this case, a project can release 10% of its tokens in the first 6 months, 25% in the second year, 40% in the third year, and 25% in the fourth year.
Cliff vesting – this type of vesting implies the presence of a cliff, which is a period when no tokens are awarded, thus delaying the start of the vesting schedule. If we take a 6-month cliff as an example, the tokens will only begin to be distributed after 6 months. Once the cliff period is over, they will follow a linear or graded schedule.
How are the vested tokens granted?
There are two main ways to award the vested tokens:
Manual vesting – the project keeps a record of its vesting schedule. When the time comes, they airdrop the tokens to all the entities entitled to receive some during that release.
Automated vesting – a third-party platform takes care of the vesting schedule, handling the token lockup and release process.
Vesting periods are not just for investors
The token vesting doesn’t apply only to investors. It can also target the people working on that project, whether they’re part of the core team, they’re advisors, partners, or contributors. The tokens they receive as a reward for their involvement can be included in a vesting schedule.
This move will ensure that the team has an incentive to keep developing the project and that it’s motivated to make the product successful. It also prevents the team from leaving the project with a portfolio rich in tokens or selling those tokens as soon as they’re listed on exchanges, a move that can destabilize the market.
, there is a 12-month cliff set for the tokens belonging to the project’s team, advisors, and founders. This cliff is followed by a 1-year vesting period during which the tokens will be released through quarterly payments.
Trivia: vesting periods originate in traditional finance, but were adapted to the crypto world following its ascent.
Crypto vesting versus token vesting versus token lockup
There is no difference between these three terms, they all refer to the same process. Crypto vesting and token vesting are more commonly used, but token lockup is just as correct.
It’s important to note that there is no ‘standard’ crypto vesting period; each project sets its schedule depending on its overarching strategy. These schedules can be influenced by any number of factors. It’s always best to do your research and reach out to the team if you have questions regarding their specific schedule.