Every new project needs funding to be successful. In the crypto industry, those funds are raised by creating tokens and selling them to the general public during pre-sale occasions or initial coin offerings (ICOs). These tokens are available for purchase by private money, angel investors, venture capitalists, and those looking for investment opportunities.
The project team will use the funds to guarantee the successful growth of their product. However, what if all of the investors made the decision to sell their tokens at the same time?
This is where crypto vesting comes into the scene. In this blog, let’s have an overview of the concept of vesting in crypto.
What is crypto vesting?
The fundamental element of tokenomics that derives from traditional finance is crypto vesting. Price variations and the project’s general integrity are managed through a fair and balanced vesting timetable for cryptocurrencies.
Similar to traditional finance, vesting is frequently employed in the crypto field to assure team members’ long-term dedication to a project. In addition, it ensures that a team has a financial incentive to continue working on the project, which gives potential investors confidence.
The project’s token supply, subject to the “lockup period,” will be set aside for a set amount of time before being distributed. “Cliff” is the name given to a durational lock. Crypto vesting is the procedure of retaining, locking, and releasing a project’s token from an Initial Coin Offering (ICO).
After the lockup period, two stakeholder groups will ultimately receive the allocation. Firstly, the first group comprises early investors who bought the project’s token during the seed or private investment rounds. Second, the project’s team members and collaborators are rewarded for their dedication and contributions. Finally, a vesting schedule for cryptocurrency applies to specific stakeholders.
What is a vesting schedule?
So-called “vesting schedules,” or the schedule by which previously generated tokens are placed into circulation, typically have an impact on the supply of most new cryptocurrencies and tokens.
Typically, only a small portion of the total tokens are in circulation at any given time. Most of the time, the remaining money is vested or somehow locked.
Initial investors and team members will often be the two main groups subject to vesting schedules. Investors may be split into several groups, each of which may have a unique vesting schedule.
Types of vesting schedules
Each project can choose how to deposit its tokens depending on its objectives. The primary categories of schedules include:
- Linear vesting: The simplest approach to set up a crypto vesting plan is linear vesting. The tokens are divided equally over a predetermined period of time. For instance, one project might decide to release 25% of the locked tokens every four months over the course of 16 months.
- Graded vesting: Gradually releasing tokens over a certain period of time—for example, a set number of months or years—is a bespoke distribution frequency that projects can choose. In this situation, a project may distribute 10% of its tokens in the first six months, 25% in the next two, 40% in the third, and 25% in the following year.
- Cliff vesting: This kind of vesting presupposes the existence of a cliff or a time when no tokens are given out, delaying the start of the vesting schedule. For instance, the tokens won’t start to be issued until after a 6-month cliff. They will adhere to a linear or graded timetable following the end of the cliff period.
Need of vesting schedules
Vesting schedules are now present in the vast number of new cryptos and tokens. This covers the majority of privately funded initiatives (i.e., no private, public, or seed sales).
Vesting helps to guarantee steady and sustainable value growth by ensuring that the supply increases over time, ideally in step with rising demand. This is accomplished by making sure that early investors, team members, and advisers are unable to suddenly sell their tokens, which might have an adverse effect on the project’s long-term viability.
Projects can guarantee that market capitalization (MCAP or market cap) increases in line with its utility and acceptance by managing the rate at which the circulating supply expands. It should be emphasized, nevertheless, that a tiny number of projects exploit vesting schedules to artificially reduce the supply of shares in circulation and raise the project’s worth. These projects frequently have very high inflation rates, which generally hurts investors in the future.
Ultimately, vesting is a crucial component of the tokenomics of crypto. Big sell-offs that frequently accompany initial coin offerings through vesting can shield public and private investors from price volatility. Additionally, vesting can considerably lessen the potential for rug pulls and pump-and-dump schemes if it is based on a safe, smart contract.
Additionally, vesting can significantly contribute to maintaining the long-term stability and longevity of a crypto startup’s ecosystem by offering developers motivation to stick with the project.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn’t represent any investment advice or WazirX’s official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.