New cryptocurrency projects regularly emerge, each seeking capital. It is now increasingly commonplace for these projects to offer tokens during crowdfunding or coin offering events.
The value of these tokens fluctuates over time and is determined by various factors, including supply and demand. Crypto vesting is employed as a way to stabilize this value. But what exactly is crypto vesting?
What Is Crypto Vesting?
Crypto vesting occurs when tokens are locked for project members and early investors for a specific amount of time, to be released after.
In the traditional finance landscape, it is common for companies to offer equity to employees. However, if these employees access or cash out their shares simultaneously, it can generate selling pressure and drag stock prices. As a result, companies usually employ vesting to delay the ownership and use of the promised assets. Crypto vesting is the crypto version of this.
It can be likened to a tentative rewards package to be given out to the first contributors of a crypto project once it has a foothold.
How Does Crypto Vesting Work?
Crypto vesting employs smart contracts to release the held tokens when a project hits certain predefined milestones. The milestones, defined by founding members of the project, could be duration-based (how long since the project started) or stage-based (the completion of specific stages in the project).
A vesting schedule is used to accomplish the time-bound release of the held tokens. This schedule spells out the duration and percentage of the token to be paid out to each early investor and the time from which they can sell the tokens they own from the initial coin offering (ICO) period.
The time frame of the release is called the token lock-up or vesting period. This period can range from six months to a few years after the introduction of the token into the market. Vesting schedules allow for the release of a certain percentage of the held token after every six to eighteen months or even more.
In the simplest terms, crypto vesting works by locking up tokens for a predetermined period. During this time, you cannot access the vesting amount until the vesting period has expired.
Crypto Vesting Schedules: How Tokens Are Released
The crypto vesting schedule is integral to a project’s roadmap, allowing investors, employees, and other stakeholders to plan when they will receive their coins. The typical vesting schedule begins with a vesting start date and several vesting periods of varying lengths.
After the vesting start date, each period will end on the corresponding vesting end date. At the end of every vesting period, you can access the assets allocated to you, depending on the terms of the agreement. After the defined period, you will receive the agreed percentage of the tokens in your cryptocurrency wallet. These released tokens can now be traded, sold, exchanged, or held still, per your wishes.
Depending on frequency and size, vesting schedules can be linear, graded, or cliff. Nowadays, there’s even the use of third-party programs to carry out automatic vesting.
Cliff Vesting Schedule
The cliff is the period from the start of a vesting period to the transfer of the first set of tokens. While not every token project utilizes the cliff vesting schedule, it is typically used with linear or graded vesting schedules to release vested tokens.
No tokens are released in the cliff vesting schedule. In fact, extended time frames are the norm in cliff vesting schedules. And, should you pull out your funds before the agreed date, you will lose all rights to the vested tokens.
This reduces the likelihood of pump-and-dump attacks, where people buy in early into a token only to suddenly pull out, thus collapsing the value of the said token.
Graded Vesting Schedule
As the name implies, the vested tokens are released in grades, each higher or lesser than the last. A definite time gap between releases is placed in a graded vesting schedule.
A certain percentage is added per grade with each time interval. For example, 20% of the vested tokens can be paid out after the first six months; 35% is paid after a year. In eighteen months, an additional 25% will have been paid. The final 15% is paid at the end of the second year, completing the release.
This staggered release format slowly introduces tokens into the market, manipulating and reducing the risk of volatility. Here, if you pull out, you will only be entitled to the percentage commensurate with your waiting time.
Linear Vesting Schedule
The linear vesting schedule is the allotment of the vested tokens in equal parts over a predefined period. Here, we could have 20% paid in the first quarter, then another 20% in the following three months. This way, the entire allotment is paid off in a year and three months.
Who Are the Parties Involved in a Crypto Vesting Schedule?
When it comes to crypto vesting, there are three key parties involved: the company offering the vesting, the investor, and the vestee.
The company offering the vesting is responsible for setting up the vesting schedule and laying out applicable rules and regulations. They will also need to develop a plan to ensure that the vestee fulfills their obligations and earns the rewards they are promised.
The investor is typically an individual or group invested in a project and token being offered. They may also provide additional funding for the project, as well as guidance and support.
Finally, the vestee is the individual or group receiving the vesting benefits. They are responsible for fulfilling their obligations under the vesting agreement, such as completing specific tasks or milestones, and must be willing to abide by all associated rules and regulations.
Each of these parties plays a vital role in a successful crypto vesting program, and working together can help ensure that everyone involved gets what they want out of the agreement.
5 Benefits of Crypto Vesting
Crypto vesting only exists because of its slew of benefits for investors, token projects, and token developers.
1. Lowers Risk of Market Manipulation
Vesting ensures no early investor or project developer is rushing to flood the market as soon as the crowdfunding period is over. Nor can they fiddle with the token supply by hoarding the tokens, creating artificial hyper scarcity. The lowered risk of market manipulation makes it easier to identify scams that generate valueless coins after obtaining funds from investors.
2. Fosters Commitment
Crypto vesting works by delaying the release of the project tokens to the owners on purpose, building resilience and commitment to see the project grow into all it was designed to be. It gives the incentive to stay and play the long game, with an assurance of rewards after the long wait.
3. Promotes Token Decentralization
Crypto vesting aims to create a secure decentralized cryptocurrency network, for which time is required. It supplies the developers with much-needed time to further work on a token with intrinsic value.
4. Reduces the Risk of Market Fluctuations
Vesting helps distribute tokens such that a large proportion of the project’s tokens are not unduly held by a single person or a small number of people. This single person or small group can easily create market supply fluctuations if left unchecked. These market fluctuations are detrimental to the token’s value and cause losses to retail investors.
5. Great Investment Opportunity
Crypto vesting allows you to invest in cryptocurrencies while retaining ownership until you sell or exchange them. Once you participate in the ICO of a token you believe has potential, it makes you an early investor entitled to vested tokens. These tokens can be sold off later, giving you a lovely return on the capital invested.
Tap Into the Benefits of Crypto Vesting
There are numerous advantages to crypto vesting for a crypto investor, a process that is expected to become a standard component of crypto launches. By learning about the practice, benefits, and features of crypto vesting, you can ensure you can make sound financial decisions when offered the chance to invest in a crypto project.