Vesting in cryptocurrency is a process in which tokens or coins are allocated to individuals or companies (those can be team members, advisors, or investors) and then, these tokens or coins are released over a specific period. This helps to ensure that recipients don’t get all tokens or coins at once but they receive them according to a specific schedule. The vesting mechanism encourages long-term commitment and makes sure that investors are aligned with the goals of the project.
Table of contents
- How Does Vesting Work in Cryptocurrency?
- Vesting for Teams, Investors, and Users
- Examples of Vesting in Crypto Projects
- Risks and Drawbacks of Vesting
- How to Check Vesting Conditions in a Project
- Conclusion
Why Vesting is Essential in Blockchain Projects
Vesting is very important for blockchain projects. When projects implement vesting schedules, it helps them to:
- Ensure that team members and investors remain committed to the project's success over the long term.
- It prevents investors from selling the coins as soon as those are allocated and destabilizing the coin price.
- Vesting shows that a project has long-term plans for growth.
Who Uses Vesting?
Vesting is used by a wide range of projects. It is applied to the project founders and developers to incentivize the project development. Early investors are often also subject to vesting to ensure they will support the project in the long term. Vesting can be applied even to community members to encourage their long-term engagement, this is often observed in play-to-earn games, airdrops, and other incentive-based programs.
How Does Vesting Work in Cryptocurrency?
Vesting needs proper planning and a deep understanding of how a project works and how it is going to develop.
Main Mechanisms of Vesting
A vesting schedule determines how and when tokens are released to participants. Such schedules are managed by smart contracts, this helps to ensure that everything is transparent and fair. The main vesting components are:
- Total allocation: This is the total number of tokens allocated to an individual or entity.
- Vesting period: This is the time over which the tokens will be distributed.
- Cliff period: This is an initial period during which no tokens are released. The cliff period ensures that recipients meet minimum requirements and commitments before they get the tokens.
- Release schedule: The release schedule determines when the tokens are released (for example, monthly, quarterly, etc.).
There are the following vesting types.
- Linear vesting: The tokens are released evenly throughout the entire vesting period. For example, if you have a 12-month vesting schedule, and the total allocation is 1200 tokens, you will get 100 tokens each month.
- Cliff vesting: In this case, you won’t get any tokens until the cliff period ends. For example, if you have a 12-month vesting with a 3-month cliff, it means that you won’t get any tokens for the first 3 months. After that, tokens will be distributed every month.
- Step vesting: In this case, tokens are released in predetermined chunks at specific intervals. For example, you may get 25% of tokens every quarter of the year.
How Vesting Impacts the Token Price
Vesting schedules impact the token price a lot. They prevent sudden spikes in token supply and price drops. However, on the other hand, unlock events can also lead to token price fluctuations when a lot of tokens enter the market all of a sudden.
- Vesting for Teams, Investors, and Users: Vesting is used differently and has different purposes for different types of users and investors.
- Vesting for Founders and Developers: Vesting for founders and developers shows that they are committed to developing the project. When they lock their tokens, they are motivated to work further on the project to realize the value of their allocations.
- Vesting for Early Investors (ICO, IDO, IEO): Early investors often receive tokens in initial coin offerings (ICO), initial DEX offerings (IDO), and initial exchange offerings (IEO). In most cases, there are always vesting schedules. In this case, vesting is needed to ensure that early investors get interested in the project’s growth. It doesn’t allow them to dump tokens immediately when they receive them.
- Vesting for Users in Play-to-Earn and Airdrops: Play-to-earn games and coins that organize airdrops also use vesting often. For example, users can earn in-game tokens but those tokens may be vested. This is done to encourage players to continue with the game. In airdrops, projects may distribute tokens under vesting schedules. This is made to ensure that community members continue with the project.
Examples of Vesting in Crypto Projects
Here are some examples of vesting in different popular blockchain projects.
- Early Ethereum investors had their tokens vested.
- Solana had vesting for team members and early investors.
- Polkadot also implemented vesting for founders and investors.
Risks and Drawbacks of Vesting
Vesting is advantageous for a project, but for investors, users, and developers, it comes with some risks.
For example, locked tokens limit liquidity. This makes it difficult to trade the token. Another drawback is that the token may drop in price when the market is down during the token unlock. This reduces the income from the token sale or even causes investors to lose the money they had invested in the token.
Vesting for developers encourages them to work on the project's success in the long term. But if developers are not compensated in the short term, this discourages them rather than on the contrary.
Another significant disadvantage of vesting is long vesting schedules. Sometimes, investors need years to have their tokens unlocked, and this can cause frustration and even diminish the investors’ interest even if the project is good.
How to Check Vesting Conditions in a Project
You shall understand clearly vesting conditions if you want to invest in a project. To do it, read the project’s whitepaper, projects normally specify vesting conditions there. Also, pay attention to blog posts and announcements on social media. Finally, if you understand smart contracts and if they are available publicly, check them too. They provide reliable and transparent information about vesting.
The Main Details That Will Help You Analyze Tokenomics and Distribution Schedules
You can analyze the project’s tokenomics and token distribution to understand if you shall invest in the project. First of all, check the total supply of the token and how tokens are allocated among stakeholders. Check how the tokens will be released. And assess how the token may behave when a large token unlock event occurs. These details will help you to invest in new projects correctly.
Tools That Will Help You to Track Vesting
Here are the main platforms that can help you monitor vesting schedules and token releases:
- Token Unlock: This platform tracks upcoming token unlock events for various projects.
- Dune Analytics: This resource offers customizable dashboards that will help you to analyze vesting and token distribution.
- CoinGecko/CoinMarketCap: These popular resources provide basic tokenomics data. You can also check vesting schedules there.
Conclusion
Vesting is very important in cryptocurrency. It helps to make the project stable and protect the value of the project’s token. Investors and users shall learn all about vesting conditions before they invest in any token. This will help to assess correctly whether it is worth investing and distribute investments accurately.
