What is vesting in crypto? Vesting is typically used in token sales, ICOs, and other crypto-related fundraising activities to impede early participants from prematurely transferring their tokens and encourage long-term dedication.
In this guide, we’ll discuss the meaning of crypto vesting, its purpose and types, the crypto vesting period, and more. Without further ado, let’s start.
What Does Vesting in Crypto Mean?
If you are a beginner exploring a project’s tokenomics or investing in a new cryptocurrency, you’ve probably heard about the term ‘vesting.’ So, what is vesting in crypto? The term means holding up tokens for a specific time, commonly done during fundraising events and ICOs.
During these periods, crypto vesting ensures that early investors don’t quickly sell their assets and leave but stay committed to the project. So, crypto vesting refers to the phased or gradual token or coin release to stakeholders: founders, employees, community members, or investors.
What Is the Purpose of Vesting?
Crypto vesting’s main goal is to foster long-term commitment, ensuring that participating teams and advisors commit to the project in the long haul. Vesting encourages investors to make long-term investments by preventing sudden price drops.
It also aims to reward everyone who contributes to the project’s long-term success and ensures they share the crypto tokens fairly.
Another purpose of crypto vesting is risk reduction, lowering the opportunities for bad actors to create a pump-and-dump scam. Two primary methods are used to ensure security:
How Does Vesting Crypto Work?
Vesting originates from traditional finance, meaning transaction control of tokens for a specific time. Crypto vesting involves temporarily locking up tokens, enabling their release over a certain period, usually spanning a few years, and releasing them at particular intervals.
This mechanism typically depends on a few conditions. For example, a specific percentage of the token amount can be released within a particular period for someone working on a project. Moreover, the token release can be provided upon staying in a project for a specific period or achieving certain performance targets.
To ensure clear and automatically applied regulations, vesting typically uses smart contracts on the blockchain.
For those wanting to monitor their vesting progress, using a crypto vesting tracker can provide real-time updates and help manage token distributions effectively.
When Is the Vesting Crypto Period?
The vesting period in crypto, otherwise known as the ‘vesting schedule,’ is when tokens are locked and, over time, start to be released. The time at the start, when no tokens are released, is called a “cliff,” and its length differs from project to project. The vesting period is typically outlined in the project’s legal agreements or whitepaper.
A usual token vesting schedule features a one-year cliff when no assets are released for use but then start being available in specific amounts month by month. This method aims to keep advisors, team members, founders, and participants committed to the project long-term. Some schedules include an “accelerated” vesting due to specific conditions, such as a company sale.
Types of Vesting in Crypto
There are four types of crypto vesting:
Milestone-Based Vesting
Such a token vesting platform allocates assets when certain benchmarks or goals are reached. Some blockchain projects use this method for their team members and partners to keep them motivated and focused on specific objectives.
For instance, a token portion may be distributed after a specific number of investors is achieved, a particular feature is successfully implemented, or other milestones.
Time-Based Vesting
This type allows for gradual token allocation after a set amount of time. An example of this is Ethereum’s time-based vesting system for its early backers. Many smart contracts that are publicly accessible enable the progressive vesting of ERC-20 tokens, like those distributed to founders in any of the top crypto crowdsales.
However, there is currently no equivalent method for vesting “raw” ETH, which differs from wrapped Ether. When we say ‘raw,’ it means the unaltered state of the token. Compared to Ethereum representations on other blockchains, such as ERC-20 tokens representing Ether on other networks or wrapped Ether on the Ethereum network, raw Ether is not wrapped or tokenized.
This original Ethereum is not compatible with some smart contracts or functionalities designed for tokens and needs specific mechanisms for vesting, which aren’t as easily accessible as for tokenized assets.
Hybrid Vesting
This model combines the previous two models. Blockchain projects frequently use this model, with some assets following a schedule and being released gradually and others being released when a particular goal is reached.
Some tokens are available when the project reaches a specific milestone, while others are released over time. This model rewards the participants for achieving project goals and their long-term commitment.
Projects recognized as crypto with the best tokenomics often implement these sophisticated vesting models to maintain a balanced token supply and foster sustainable growth.
Reverse Vesting
Here, tokens may be reclaimed by the issuing entity if specific requirements are unmet. Filecoin used this model for its SAFT users. A schedule promoting long-term network alignment dictates how mining rewards are allocated: 75% of block rewards are progressively released over 180 days, and 25% are immediately released to enhance miner cash flow.
SAFT investors will gain their FIL tokens over three years, whereas The Filecoin’s Foundation and Protocol Labs teams will gain extra tokens over six years.
Why Vesting Crypto Is Important
If a new crypto project sells a substantial amount of tokens at its beginning, it may suffer enormous selling pressure when listed on CEXs and DEXs. This is partly because the price drops dramatically when a large quantity enters the market.
So, token vesting helps by giving the project time to mature and build its value over time. It prevents a small early investor group from gaining too much control over the supply after getting listed. Otherwise, they could manipulate the price and harm the project’s ecosystem.
Conclusion
What is vesting in crypto? The term means holding up tokens for a specific time, commonly done during fundraising events and ICOs. Crypto vesting’s main goal is to foster long-term commitment, ensuring that participating teams and advisors commit to the project in the long haul.
Vesting typically uses smart contracts on the blockchain to ensure clear and automatically applied regulations. A typical vesting schedule features a one-year cliff when no assets are released for use but then start being available in specific amounts month by month.
There are four types of crypto vesting: milestone-based, time-based, hybrid, and reverse. Crypto vesting helps by giving the project time to mature and build its value over time.