What Is Token Vesting? Meaning, Schedule Types, and Security
Token vesting is the process of locking tokens for a certain period, with gradual release based on a predetermined schedule. It aims to prevent early token sales and stabilize the project’s token price, ensuring long-term investor commitment.
Key Takeaways
- Token vesting ensures that early investors, project team members, and advisors remain committed to the long-term success of a project.
- It also helps prevent large sell-offs, which could negatively impact token value in the market.
- Vesting schedules are typically implemented through smart contracts to ensure trust and transparency.
- Token vesting is commonly applied during Inicial Coin Offerings (ICOs), crypto presales, and other fundraising events.
- Different vesting models — time-based, milestone-based, and hybrid — are tailored to project needs.
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 saturated.
Token vesting helps reduce this price drop risk by giving the project time to mature and gradually become popular. Holding some tokens for a set time prevents early investors from gaining too much control and manipulating the token’s price, which could destabilize the project.
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 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.
Crypto presales often employ vesting schedules as a means to stabilize token supply and prevent sudden market sell-offs. In presales, tokens are usually offered at discounted prices, but investors must wait for the vesting schedule to release tokens gradually, reducing the risk of price manipulation.
Types of Token Vesting Schedules
There are various types of token vesting schedules. Let’s explore the main ones.
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 managed the gradual release of ERC-20 tokens.
to illustrate this, imagine 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 starts releasing 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 new cryptocurrency projects, token vesting schedules 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 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.
Filecoin immediately made 25% of mining rewards available to help with cash flow, while the remaining 75% were 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.
The Role of Token Vesting in Crypto Presales
are an early-stage fundraising mechanism where investors can buy tokens at discounted rates before a project’s official public launch. Presale tokens are often subject to vesting schedules to:
- Ensure that tokens aren’t immediately sold after the presale, which could destabilize the token’s price.
- Prevent a large influx of tokens entering the market at once, which could lead to a significant drop in value.
Instead, these tokens are released gradually over time, allowing the project to mature and gain traction while maintaining market stability. Here are examples of cryptocurrency presales with healthy token vesting schedules:
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. 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.
Final Thoughts on Token Vesting
Token vesting is essential for ensuring long-term commitment from investors and team members in cryptocurrency projects. By using smart contracts to manage vesting schedules, projects can securely distribute assets, align interests, and prevent early sell-offs that could destabilize token value.
Despite challenges like regulatory uncertainty and smart contract risks, the benefits of token vesting — such as promoting stability, investor confidence, and sustainable growth — make it a key strategy for the success of blockchain projects.
To keep learning about crypto, read our guide on tokenomics next. Understanding how token supply, demand, and distribution work helps you evaluate projects more effectively and spot growth potential.
👉 Learn More: What Is Tokenomics in Crypto?
FAQs
What does it mean for a coin to be vested?
When a token is vested, it means you fully own it and can sell or transfer it. Before vesting, the coin is locked and unavailable until certain conditions, like time or milestones, are met.
What is the difference between vested and unvested tokens?
Vested tokens are fully owned and can be sold or transferred. Unvested tokens are still locked and cannot be accessed until certain conditions, like time or milestones, are met.
What is the difference between vesting and lockup period?
Vesting gradually releases tokens over time based on a schedule. The lockup period prevents you from selling any tokens during a set timeframe. After the lockup, tokens might still be subject to vesting, releasing in portions rather than all at once.
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