Crypto Vesting: What Is It And How Does It Work?

Crypto Vesting Explained

Crypto vesting is a popular strategy in the world of cryptocurrencies. Vesting is adopted in initial coin offerings (ICOs) and token sales. This strategy encourages people to stay for the long haul rather than grab tokens and run.

It works by establishing a system in which those who receive tokens gain access to them over time. This procedure is carried out in chunks at predetermined times, known as the vesting period.

Typically, this schedule is classified into two parts: first, there is a waiting period known as the cliff. Consider it like the cliff’s edge, where you must wait before proceeding. Then, the tokens will be available in regular installments.

This setup keeps everyone committed and invested in the long run. It safeguards against people grabbing their tokens, making a quick profit, and then abandoning the project.

This approach is utilized by team members, early investors, and project founders to align their interests with the project’s success. Smart contracts on the blockchain transparently enforce vesting rules, increasing trust among stakeholders and the community.

Following vesting periods, tokens are gradually unlocked based on meeting specific conditions such as milestones or timeframes.

Types Of Crypto Vesting

Time-based Vesting

Vesting over time refers to the gradual distribution of tokens to holders. Ethereum accomplished this for its early supporters by employing a time-based system.

They used smart contracts to gradually distribute ERC-20 tokens, similar to those distributed to founders during a crowd sale. However, unlike other Ethereum versions, such as wrapped Ether, there is no simple way to vest “raw” Ether.

Raw Ether is the original Ethereum cryptocurrency, unaltered or tokenized. It is not the same as wrapped Ether or tokens representing Ether on other networks.

However, this original Ether does not play well with certain token-specific functionalities or contracts. It requires specific vesting mechanisms, which are less available than for tokenized assets.

Milestone-based Vesting

Token distribution in milestone-based vesting is contingent on meeting specific project objectives or checkpoints. Certain blockchain initiatives use this system for their partners and teams.

Tokens are released in stages, such as when a specific feature is successfully added or when significant project milestones are met, such as the completion of a protocol update.

Hybrid Vesting

When time-based and milestone-based vesting are combined, a hybrid model is created, and it’s commonly used in blockchain projects. Teams and early supporters are given a portion of tokens that are gradually unlocked over time.

At the same time, another portion of tokens is released, contingent on meeting specific project goals.

Reverse Vesting

“Reverse vesting” works opposite to standard vesting methods, in which initially owned tokens can be lost if certain criteria are not met. This was adopted by Filecoin’s Simple Agreement for Future Tokens (SAFT) participants.

To align with the network’s long-term goals, mining rewards in Filecoin follow a structured schedule. Initially, 25% of block rewards are released immediately to support miner finances, with the remaining 75% vesting gradually over 180 days.

Protocol Labs teams and the Filecoin Foundation will acquire additional Filecoin (FIL) tokens over six years. SAFT investors, on the other hand, will receive their tokens over three years.

Crypto Vesting Vs. Traditional Finance Vesting

Crypto vesting models are similar to traditional financial vesting models but have additional features due to blockchain technology. Smart contracts on the blockchain automate and transparently enforce vesting rules in the crypto world.

The primary goal of crypto vesting is to align the interests of token holders, investors, advisors, and project teams—with the long-term growth of the project. Traditional finance, on the other hand, frequently associates vesting with equity-based compensation plans such as stock options and restricted stock units (RSUs).

Traditional vesting is typically centralized and managed by institutions, whereas cryptocurrency vesting is based on decentralized platforms that use smart contracts.

How Token Vesting Impacts Supply

Token vesting regulates the number of tokens in circulation. Tokens linked to vesting are only tradable sometimes.

These tokens are not counted in the available supply during the vesting period. Tokens enter the circulating supply after the unlocking process based on predetermined schedules or conditions.

This process can influence market behavior, investor sentiment, and the ecosystem’s supply-demand balance.

What Are The Benefits Of Crypto Vesting?

Vesting is enforced transparently and automatically by smart contracts in decentralized networks, fostering trust among token holders. Whether through time-based or milestone-based vesting, teams, advisers, and investors align their interests with the project’s success.

The flexibility of cryptocurrency vesting allows customization to meet specific needs. Also, blockchain technology increases security by resisting centralized tampering.

Crypto vesting is critical for long-term project growth, reducing speculation, and increasing investor trust.

Challenges And Risks Of Crypto Vesting

Regulatory uncertainty in cryptocurrency may make enforcing vesting contracts difficult, raising legal concerns. Smart contract flaws or coding errors could jeopardize token holdings, resulting in unexpected outcomes or security breaches.

Liquidity risks associated with unlocked tokens could cause market fluctuations or sell-offs. Differences in vesting procedures between projects confuse investors; thus, balancing dedication recognition and project success can be difficult.

Ending Thoughts

Navigating the complexities of crypto vesting requires paying close attention to legal, technological, and market factors.