What Is Token Vesting?
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Token vesting is one of the main concepts to understand when you want to start studying the crypto market, especially if you plan to participate in initial coin offerings as part of your investment strategy.
This article will explore token vesting, the different types of vesting schedules—such as time-based, milestone-based, hybrid, and reverse models—and their importance in the crypto ecosystem. We’ll also discuss the advantages, risks, and security considerations of token vesting and the differences between manual and automated testing processes.
Read on to discover how these mechanisms work and why they are vital for the sustainable growth of blockchain projects.
What Is Token Vesting?
Token vesting in crypto means holding up tokens for a certain time. This is common during initial coin offerings (ICOs) and fundraising events. Token vesting during these periods ensures that early investors stay committed to the project instead of quickly selling their assets and leaving.
What Are Token Vesting Schedules?
In crypto, token vesting schedules are periods during which tokens are locked and then start to be released over time. The waiting period for the assets to be released is called “a cliff,” its length varies from project to project.
Smart contracts on the blockchain are used to implement a token vesting strategy. This ensures that the rules are clear and followed by everyone involved. This setting helps build trust among the participants, showing that the key stakeholders are committed to the project’s long-term goals.
For example, a common schedule involves a one-year cliff during which no assets are available. After this year, tokens start to be released in certain amounts each month. This method ensures that team members, advisors, participants, and founders remain committed to the project and share its long-term goals.
Types of Token Vesting Schedules
Various types of token vesting exist, and we will explore the three main kinds currently available in the market.
Time-Based
With time-based strategies, assets are gradually given to holders over a certain period. For example, Ethereum used this system for its early supporters, where smart contracts on the blockchain manage the gradual release of ERC-20 tokens, like those given to founders in a sale.
Suppose the following scenario: a company gives its employees some shares they can’t sell immediately. Instead, those shares can only be accessed within a year (the cliff). After this initial period, a smart contract might release a portion of these shares each month. This ensures that employees remain dedicated to the company’s success because they gain access to more shares over time. Similarly, in cryptocurrency projects, token vesting schedules managed by smart contracts ensure everyone involved is working towards the same long-term goals.
Milestone-Based
This method distributes assets when specific project goals or benchmarks are achieved. Some blockchain projects use this method for their partners and team members to ensure that they remain motivated and focused on critical objectives.
For example, a portion of the tokens might be given out once a specific feature is successfully implemented, a certain number of investors is achieved, or other significant project milestones are reached.
Hybrid
In the hybrid model, we combine both models mentioned above. Blockchain projects often use this mixed model for distributing tokens. Some assets are released gradually, following a schedule, while others are released when specific project goals are met.
Some tokens are released over time, while others become available when the project reaches certain milestones. This approach rewards the participants, at the same time, for their long-term commitment and for achieving essential project goals.
Reverse
This works like getting a bonus at work but with conditions. In the reverse model, assets you initially own can be removed if you don’t meet certain conditions. Filecoin used this method in its SAFT contracts.
In the Filecoin case, 25% of mining rewards are immediately given to help with cash flow, while the remaining 75% are gradually released over 180 days. Additionally, the Protocol Labs team and the Filecoin Foundation will get extra Filecoin (FIL) tokens over six years, and SAFT investors will receive their assets over three years.
Why is Token Vesting Important?
When a new crypto project launches and releases many tokens at once, it often faces significant selling pressure when listed on Centralized Exchanges (CEX) or Decentralized Exchanges (DEX). This pressure can result in a significant price drop as the market becomes too full of this token.
Token vesting helps to reduce this price drop risk by giving the project time to mature and gradually become popular. The strategy of holding part of the tokens for an amount of time prevents a small group of early investors from gaining excessive control over the total amount of tokens and, consequently, having the possibility of manipulating the token’s price, destabilizing the whole project.
Token Vesting Security
The safety of locked tokens is crucial in crypto vesting because it involves securing large assets worth significant sums of money. To ensure security, there are two main methods:
- Founder-Controlled Token Vesting: Assets remain in the possession of the founders, who manage the release schedule themselves.
- Third-Party Platforms: Founders use external token vesting platforms to set up and manage the release timeline securely.
Ensuring these methods are safe and transparent helps protect you and maintain trust in the project’s long-term commitment.
Manual vs. Automated Vesting
Currently, token vesting can be done in two ways: manually or automatically. Although the manual option may seem safer, it has some limitations:
- Transaction Fees: Similar to bank transfer fees, when choosing to vest manually, these fees accumulate with each transaction, leading to high overall costs.
- Time-Consuming: Manually handling large amounts of assets for large groups of participants takes time and is highly likely to result in errors. These errors can be costly and delay the distribution process.
- Lack of Transparency: Manual token vesting often means only a few key people can access the locked assets. This lack of transparency can lead to unfair practices like founders withdrawing their assets secretly or dumping them when the project’s value peaks.
Automated token vesting ensures better security, transparency, and efficiency, making it a more reliable option for managing distributions.
Advantages and Risks of Token Vesting
The main advantages of using token vesting are:
- Transparency: Token vesting powered by smart contracts automatically enforces vesting schedules, reducing the risk of central manipulation and tampering. This transparent and secure management helps build trust among holders.
- Alignment of Interests: Holding the assets for some time may help teams, advisers, and investors remain committed to the project’s long-term success.
- Flexibility: This practice allows projects to customize token vesting schedules to meet their requirements.
- Investor Confidence: Improves investor confidence by demonstrating a commitment to sustainable growth and proper management of distribution.
As with everything involving the crypto market and investments, there are also some risks that you need to be aware of before engaging in token vesting. Here are some of the most prominent ones:
- Uncertainty Involving Regulations: Some regulatory uncertainties in the developing cryptocurrency ecosystem may make enforcing vesting contracts challenging.
- Smart Contract Vulnerabilities: Due to smart contract flaws and code mistakes, asset holdings could be compromised, resulting in data breaches, for example.
- Liquidity: The liquidity risk attached to vested assets may cause unexpected market changes or sell-offs once unlocked.
Conclusion
Token vesting in cryptocurrency is critical for ensuring long-term commitment from investors, team members, and advisors. By implementing these schedules through smart contracts, projects can transparently and securely manage the distribution of assets, aligning stakeholder interests with the project’s success.
This practice prevents early sell-offs, which can destabilize the asset’s market value. It also increases investor confidence by demonstrating a commitment to sustainable growth and proper management.
However, the effectiveness of token vesting comes with its challenges. Regulatory uncertainties, smart contract vulnerabilities, and liquidity risks can challenge the implementation of this practice. Despite these risks, the benefits of using automated and secure token vesting methods outweigh the drawbacks, making it an essential strategy for the healthy development of blockchain projects.
FAQ
What Is the Concept of Token Vesting?
Token vesting is a common practice in the crypto industry. In this practice, companies sell tokens to investors during initial coin offerings (ICOs) and limit their access to them for a certain period.
What Is the Difference Between Vesting and Lockup?
Lockup is another term for token vesting. So, the main difference between lockup and token vesting is that with the first, you gain immediate legal ownership of the asset. With token vesting, you can only use and trade the assets as they become available over time, either sent by the company or automatically through a smart contract.
What Is the Difference Between Vested and Unvested Tokens?
Vested tokens are wholly owned by you and can be sold or transferred immediately. Unvested tokens, however, are still under the control of the issuing entity, with you needing to fulfill certain conditions or wait for a specified period before gaining full ownership and control.
What Does It Mean for a Token To Be Vested?
When a token is vested, it means it has met all the conditions set by the issuer and is now wholly owned by you.
What Is the Vesting Period?
The vesting period is when you must wait before gaining full ownership and control over your assets. During this time, the tokens remain locked and cannot be sold or transferred until the period ends and the conditions are met.
Elena Bozhkova 
