Token Vesting

Token vesting in cryptocurrency entails a predetermined timeframe during which investors are prohibited from selling their tokens. This measure is primarily implemented to safeguard DeFi projects from premature token sales until investors have complete access to their holdings.

The term vesting has its roots in the Latin word "vestire," which denotes an action of clothing or covering something. A token vesting schedule is established to restrict the immediate sale of coins. Notably, this restriction also applies to project developers who cannot conclude the project during this stipulated period.

• Token vesting refers to a schedule where the coins bought at pre–sale events are locked in smart contracts. As a result, investors cannot use the entire holding. 
• These tokens have different schedules, like linear, graded, and cliff vesting. The firm will release them in batches (fixed or different percentages) until the vesting period ends. 
• For example, a company may release tokens in 10%, 20%, 30%, and so on after six months. This period until six months (or release) is lockup time. 
• It prevents developers from abandoning the project and creates price stability with an adequate supply of tokens.

Token vesting is a crucial period during which investors are restricted from selling their tokens, and developers are prevented from accessing project funds prematurely. It safeguards the project's integrity and encourages long-term commitment. A token vesting schedule is established as part of the project's protocol, outlining the gradual release of tokens to investors over time.

The process typically begins with the project team deciding on a vesting schedule. A token vesting smart contract or agreement is created to enforce the lockup period, ensuring that tokens remain inaccessible for a specified duration. This release process can be automated or manual, with tokens gradually becoming available to investors as the vesting period progresses, often divided into segments referred to as cliffs.

Early-stage projects often attract significant investment from backers who acquire tokens at discounted rates through agreements, like the Simple Agreement for Future Tokens (SAFT). However, this can introduce the risk of price manipulation by these stakeholders to maintain price stability. Various platforms employ token vesting tools, typically before the initial coin offering (ICO) or initial DEX offering (IDO).

Project developers determine vesting schedules and granting processes, and they communicate these details to the public and investors through channels such as press releases, newsletters, and whitepapers. This transparency underscores the team's commitment and provides a clear roadmap for token release, enhancing trust and project credibility.

Token vesting platforms offer three major vesting schedules based on the company's objectives. Let us explore each of them:

1. Linear Vesting: Linear vesting follows a straightforward, linear pattern with a fixed increase in token releases. These releases can occur in equal amounts or stipulated portions. For example, a vesting schedule might release 25% or 10% of tokens at regular intervals over a specified period. The duration of the vesting schedule depends on the predetermined time frame.
2. Graded Vesting: Graded vesting involves applying different release rates within the vesting schedule. In this approach, the company customizes token releases in varying amounts. For instance, the schedule could release 10%, 15%, 20%, 25%, and 30% of tokens to investors over time, gradually increasing the allocation.
3. Cliff Vesting: Cliff vesting begins when an investor meets specific criteria, typically after a probationary period. During this initial cliff period, investors may not have access to any tokens. The linear or gradual vesting schedule commences once they successfully pass the probationary phase. Subsequently, investors start receiving tokens according to the predefined vesting schedule.

Let us look at the examples to comprehend the concept in a better way:

Example #1

Suppose Kevin and James are businessmen in the technology sector. They own certain manufacturing plants in the state. But, in the past few months, they desired to add more cryptos to their portfolio. Therefore, they bought a 30% stake in the crypto firm ABC Ltd. Both received tokens at a discounted rate of 3%.

However, they did not receive a physical delivery of the tokens. Instead, Kevin and James had to wait 24 months to get their full custody of their tokens. The firm installs various token vesting tools to ease this process. With a vesting schedule of two years, the investors slowly receive ABC tokens (30% token release after six months until 24 months).

Here, James and Kevin had bought 200 tokens each. But even the firm knew giving the entire amount may disrupt the supply and price movements. Therefore, they decided to release it in cliffs (or parts) to balance the price stability.

Example #2

In September 2023, the FTX exchange's decision to sell its crypto assets, including a substantial holding of Solana (SOL) tokens, garnered attention. While this move is part of the exchange's bankruptcy proceedings, it is important to note that a significant portion of these assets is locked in vesting until 2028. FTX can only gradually sell between $100 to $200 million worth of crypto assets per week.

The token vesting period safeguards against a sudden market flood, ensuring a more controlled release. While some concerns have arisen regarding potential downward pressure on SOL's price, experts believe the impact may not be as severe as anticipated. It's essential to consider this situation within the context of FTX's larger holdings and the crypto market's resilience, which has historically overcome challenges.

Apart from the various features available, there are more benefits. Let us look at them:

1. Protection Against Price Fluctuations: The prime advantage of vesting is the supply of tokens gets limited to its demand. Vesting avoids the sudden release of tokens by locking in a predefined time. As a result, investors cannot trade them, and there is a risk of huge market spikes due to supply halt. 
2. Reduces Market Manipulation: By not being able to trade tokens physically, the market automatically stabilizes. Therefore, the chances of market manipulation by these traders are reduced. They cannot perform 'pump and dump' to realize profits. 
3. Space For Project Development: As it occurs at pre-sale events, it provides enough funds for developers to finish the project. Within this period, they can enhance tokenomics and attract potential investors to their token. Likewise, even investors can monitor the progress and decide on their investment decisions. 
4. Consistent Distribution Of Tokens: Cryptocurrency companies usually work parallel to traditional vesting methods to balance the market supply of the tokens. They release them on cliffs so investors do not sell them at once. It helps in maintaining consistency with the demand and supply forces.  

Although token lockup is a part of token vesting, they have varied characteristics that make them distinct. Let us look at them:

This article has been a guide to what is Token Vesting. Here, we explain the concept along with its types, examples, benefits, and comparison with lockup. You may also find some useful articles here -

• Tokenomics
• Crypto Token
• NFT (Non-Fungible Tokens)