Vesting
What Is Vesting
Vesting is the process where tokens or other digital assets are gradually released or unlocked according to a predetermined schedule, often in accordance with specific conditions or milestones. This is designed to ensure that participants, such as founders, team members, or early investors, remain committed to a project long-term rather than receiving their entire token allocation upfront.
By using a vesting schedule, projects can promote stability, reduce the likelihood of large-scale sell-offs, and align incentives between all parties involved. Vesting is commonly applied to token allocations in initial coin offerings (ICOs), airdrops, and rewards for contributors to decentralized networks.
Vesting is the process of releasing or unlocking tokens over time according to a defined schedule, ensuring that recipients earn their tokens based on their continued involvement or contribution to a project. Vesting schedules are often used in startup ecosystems, and in cryptocurrency, they serve to maintain long-term engagement from founders, team members, early investors, or advisors. This approach prevents immediate access to the full allocation of tokens, which reduces the risk of price volatility caused by mass sell-offs.
How Does Vesting Work
Vesting Schedule
A vesting schedule determines how and when tokens are released to the participants, ensuring that recipients remain aligned with the long-term success of the project and are incentivized to contribute to its growth and development. These schedules vary depending on the project’s goals and the specific conditions agreed upon with recipients. There are several common types of vesting schedules:
Linear Vesting: Tokens are released gradually over a specified period, with a fixed amount being unlocked at regular intervals. For example, a recipient may receive 1/12th of their tokens each month over the course of a year.
Cliff Vesting: Recipients do not receive any tokens until they have reached a certain milestone or period, known as the "cliff." After the cliff period, a large portion of the tokens may be released all at once, with the remainder being unlocked gradually thereafter. For instance, after a one-year cliff, 25% of the tokens could be released immediately, followed by linear vesting for the remaining 75%.
Graded Vesting: Tokens are released at specific intervals, but the amount released may vary depending on the milestone or time period achieved. A common example is where 10% of the tokens are unlocked after one year, with the remaining tokens released in increments over the following years.
Lock-up Period
During a lock-up period, tokens are locked and cannot be transferred or sold. Lock-up periods vary depending on the project, and they may range from a few months to several years. Once the lock-up period expires, the vesting schedule begins, allowing recipients to start receiving their tokens based on the agreed-upon terms.
Lock-up periods are commonly used in conjunction with vesting schedules to prevent recipients from liquidating their tokens too early, which could negatively impact the project’s token price. These lock-up periods often apply to founders, team members, and early investors to ensure they remain committed to the project’s success.
Use of Smart Contracts
In some projects, smart contracts play a key role in managing the vesting process. A smart contract ensures that tokens are released automatically and fairly according to the vesting schedule, without the need for manual intervention or the risk of human error and manipulation. They are programmed to release the tokens only when the conditions of the vesting schedule are met, such as specific dates, performance milestones, or project achievements.
Purpose of Vesting
Promote Long-Term Commitment
By tying token distribution to time-based or performance-based milestones, vesting incentivizes key stakeholders to remain committed to the project. Founders and team members are discouraged from leaving the project prematurely, as they would forfeit any unvested tokens. Investors are similarly motivated to maintain their involvement and provide support, knowing that they cannot immediately cash out their holdings. Without vesting, early contributors might be tempted to sell their tokens immediately, which could lead to a loss of confidence in the project and a big decline in the token’s value.
Reduce Market Volatility
Vesting is a powerful tool for reducing market volatility caused by sudden token sales. Without vesting schedules, large token holders might sell their entire allocation at once, flooding the market and driving down the token’s price. By gradually unlocking tokens, vesting helps to mitigate this risk and stabilize the token’s market performance. In projects with a vesting schedule, tokens are distributed gradually, reducing the likelihood of large sell-offs that could negatively impact the price.
Build Trust
A well-structured vesting plan also signals to external investors and users that the project’s team is focused on long-term development and growth rather than short-term financial gain. This can attract more investors who are interested in the project’s sustainability and long-term potential, boosting the project’s credibility in the market.