Vesting in finance means the right to current or future payment in assets or benefits from an employer to their employee. The idea is the same in crypto, but investors receive tokens they are precluded from selling over a fixed period instead of shares.
What Are Vesting Schedules?
A vesting schedule is a master plan by which the tokens created in a cryptocurrency project are released into circulation. If you are in the crypto space and look at the tokenomics of a project or invested in a newly launched cryptocurrency, you may have seen the term vesting being used all around. Vesting in crypto describes how tokens are released into circulation. The supply of most new cryptocurrencies and tokens is usually influenced by vesting schedules. In most cases, only some of the tokens created are released over e period. The rest are locked according to the token plan stated in the project whitepaper.
The two main groups of early investors and team members are subject to vesting schedules. Investors can be divided into several groups with varying vesting periods. The most common investor levels in token sales ranked from earliest investment participants are pre-seed, seed, private sale, pre-sale, and public sales such as IEO, IDO, or ICO. Early investors often buy tokens at a favorable price but are subject to a more stringent vesting schedule.
The Solana initial token allocation is a good example of a planned vesting schedule with varying strictness according to the cost and period of investment. Seed round investors in the project got a 15.9% initial supply at $0.04 per SOL, while public sale participants bought 1.6% of the supply at $0.22 per SOL. The former had a more stringent vesting schedule defined by a 9-month cliff period.
Projects often change their vesting schedule, and the token sale agreement usually has provisions. Although early investors often unwelcome such developments. Team members of most crypto projects also receive tokens, but the tokens are subject to a strict vesting schedule, usually a 1-5 years vesting period.
What Are Token Unlocks?
Token unlocks describe when the token will enter circulation relative to the token generation event. Crypto projects are sometimes set to be unlocked every quarter or six months from the token generation event. Some unlock schedules are divided into multiple rounds, each known as a tranch. If a user is to receive 1,000 tokens each month after the token generation event, each batch of 1,000 tokens released is known as a tranch.
Unlocks may begin after a cliff period or delay before the vesting schedule takes effect. If a vested team member has a 2-year cliff, for example, their token unlock schedule will not begin until 2 years after TGE. In other cases, tokens are unlocked linearly following a cliff, meaning fractions of the tokens can be claimed following the defined elapsed time or milestone defined by the issuing project. Common token unlocks milestones include listing on a popular exchange or onboarding a certain number of users. Until tokens are released into circulation, the token remains locked and vested, while released tokens are divested.
What Are Vested Tokens?
Vested tokens may be accessible as digits on individual wallets, but they cannot be used until the delay period or cliff is reached. They are locked in for a period, hard-coded into the project, and remain so throughout the project’s life cycle. Vested tokens are also transferable.
The accessibility to vested tokens means that holder can only view their vesting balance. Viewing is made possible so that users can be sure that their tokens have not been taken away in some sudden circumstances. The price of the tokens is also tracked according to the current market price.
Why Do Crypto Projects Have Vesting Schedules?
Most crypto projects vest tokens to ensure that the supply grows steadily over time. Ideally, there is a need for stable and sustainable growth in value in line with an increased demand for the token, which can be achieved through vesting. With token vesting, project members or investors cannot dump a token randomly on the market, thus impacting the long-term viability of the crypto project.
By controlling the rate of growth in the circulatory supply of a token, a crypto project can ensure that the market supply increases in line with the project’s utility. It should be noted, however, that some project use vesting schedules to create an artificially low circulatory supply and inflate their valuation. These projects often have extremely high inflation, which could negatively impact early investors.
How Does Token Vesting Impact the Token Supply?
Token vesting changes the circulatory supply of tokens. Most projects only release a fraction of the total tokens created during the token generation event (TGE). Using a well-structured vesting schedule, the tokens are gradually brought into supply alongside the organic growth of the cryptocurrency.
An increased supply without increased demand for a token can lead to a reduction in the value of the token. Token schedules based on defined milestones can reduce inflationary pressure on the price of a token. If a token price becomes too high, for example, a token schedule set to be divested at a particular price can act as an additional supply to keep the price of the token stable.
How to Calculate A Token’s Vested Amount
The vested amount of a token is the amount that is not in circulation. Assuming a project minted 100 million tokens during the token generation event, and just 10% or 10 million tokens are in circulation, the project can be said to have vested 90 million tokens.
Not all vested tokens go out to investors during the various token sale events. Some portion of the total tokens is locked with the issuing project. The locked tokens serve various regulatory purposes to protect the project and its community in the long run.
Tokens locked with a project are considered vested because they are often released. They can also be part of the cryptocurrency project’s long-term burn and deflationary mechanism.
Conclusion
Overall, vesting schedules are important when studying tokenomics. It will be hard for investors or crypto users to understand the overall plan of the project if the project does not have a well-defined vesting schedule.
Equally, vesting also protects the project from a sudden collapse and bank run due to an endless and continuous sale or dumping of tokens on users. By mandating team members and founders of the project to vest tokens, their commitment can be retained, and they will continue to innovate since they have a stake in the long-term success of the crypto project.
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These materials are for general information purposes only. They are not investment advice, a recommendation, or solicitation to buy, sell, or hold any digital asset or engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the crypto asset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets, and you should seek independent advice on your taxation position.
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