49. What Is Cryptocurrency Vesting? What Are Its Advantages?
The cryptocurrency sector regularly sees new crypto projects seeking capital. Very often these projects offer their tokens during events such as crowdfunding or coin offerings. However, with time, the value of the tokens offered by these projects changes. This is determined by various factors, including supply and demand. To stabilize the value of these tokens, vesting has emerged. But what exactly is it?
Crypto Vesting – Definition
Vesting in cryptocurrencies is setting aside a portion of the total supply of the tokens in question and releasing them to the market when the project meets predetermined conditions. The period during which these tokens are frozen is called vesting or token lock up.
Investors are not allowed to make any transactions with these tokens during the vesting. What is the purpose of such an action? The process is supposed to reduce market manipulation and token dumping. This, in turn, is supposed to improve the stability of a given project.
All right, but what happens when these tokens are unfrozen? They are usually given to early investors in a project, as a reward or gift for loyalty.
How Does Crypto Vesting Work?
In its operation, cryptocurrency vesting relies on the use of smart contracts. These smart contracts hold the tokens until certain predefined conditions are met by the project. The specific conditions are determined by the founders of the project during its creation.
The conditions for unlocking the tokens can be based on various factors, such as the duration of the project or the completion of specific stages. For example, a condition could be set to unfreeze a certain percentage of tokens when the project reaches a specific milestone, such as generating $10,000 in revenue after one month. Another condition could be tied to the completion of a particular stage, such as unfreezing a percentage of tokens when the tokenomics phase is finished, which is the second stage of the project.
Such specified time frames are referred to as the lock-up period of a token or the vesting period. It can range from six months to several years, even after the token has been introduced to the market.
To recap: Cryptocurrency vesting is the locking of tokens for a predetermined period. During this time, we do not have any access to these coins until the vesting period expires, agreeing to a predetermined schedule.
How Are Tokens Released for Cryptocurrency Vesting?
Such a schedule is closely linked to the roadmap of a given project. This way investors, employees or other stakeholders know in advance when they will get their tokens. After this period, we receive a percentage of the tokens, which will be transferred to our cryptocurrency wallet. We can sell, exchange or farm the coins thus received.
Depending on the project, the vesting schedule for tokens can be divided into three main types: linear, graded, or cliff.
Tokens are released in a linear amount and time. That is, the number of tokens and their release periods are proportional. For example, 15% of tokens are released into circulation every 7 months.
It allows for the release of varying amounts of vested tokens at different intervals. This customized schedule aligns with the specific preferences of the project. For instance, it might involve releasing 15% of the coins after 6 months, an additional 15% after another 3 months, and the remaining 6% after the 8th month.
The most complex vesting structure is one that establishes the start of the vesting program based on the investor’s ability to maintain liquidity in the project for a specific duration. Once this period is fulfilled, the vesting process continues using either a linear or graded vesting approach.
Who Is Involved in the Vesting Schedule?
In cryptocurrency vesting we have three key parties: the vesting company, the investor and the vestee.
The vesting company establishes a vesting schedule and sets rules and regulations. It develops a plan to ensure that the vested person fulfills his or her obligations and earns rewards.
An investor is a person, or a group, interested in a particular project and the token offered. Investors can also provide additional funding for the project, interesting leads and support on many levels.
A vestee is an individual or group that receives a reward (token). It is the vestee who is responsible for fulfilling his or her obligations that arise from the vesting agreement. They must be ready to comply with all rules and regulations set by the vesting company.
Benefits of Crypto Vesting
- It allows a given project to create a healthy token economy.
- Tokens are released in stages.
- It limits market manipulation.
- Crypto vesting protects holders of the tokens in question from even extreme price fluctuations.
- It reduces the chance of pump-and-dump scams.
- It also “buys” a given project more time to fine-tune its products and services.
As you can see, there are quite a few advantages of cryptocurrency vesting. It is also not a complicated process. Thanks to our lesson today, you can easily understand it.
Get familiar with the practice, benefits, and most importantly, the aforementioned features of vesting. By doing so, you will be able to make more informed financial decisions and seize the opportunity to invest in a truly promising cryptocurrency project.