What is Vesting in Crypto?

What is Vesting in Crypto?
Table of Contents

In the same way that traditional companies rely on venture capitalists to fund their operations, the majority of new cryptocurrency projects do the same. When an investor contributes funds to a project, they are given a certain number of crypto tokens in an amount that is equal to the amount of money they invested.

The value of those tokens varies over time and is influenced by a variety of different variables, the most important of which are supply and demand. If early investors were to abruptly flood the market by selling all of their tokens, the project’s future success would be put in threat since token values would suddenly collapse. This would put a risk on the project’s ability to attract further investors in the future. Many recently launched projects have a coin vesting programme to prevent something like this from taking place.

Read also: What is Staking in Crypto?

What exactly is Vesting

When a blockchain-based project becomes successful, there are inherent dangers involved, one of which is the possibility that the time and effort invested in its creation would be wasted. If everything works out as planned, it only makes sense that those who took the first risk—including company founders, early investors, and early employees—should be compensated. The process of vesting comes into play here.

The term “vesting” refers to the locking up or allocation of a particular proportion of the maximum circulation of the token before the initial coin offering (ICO) or initial DEX offering (IDO) for the major stakeholders participating in the project. Typically, this percentage ranges from 20 to 25 percent. After a specific amount of time that is referred to as the vesting period, these tokens are subsequently passed over to the respective parties.

How does it work

In most cases, the process of vesting starts with the allocation of certain assets that will be held in reserve for the vesting process. These may take the form of crypto tokens, equities, stock options, pensions, or any number of other assets. For instance, after 10 years of dedicated service to the firm, an employee may be eligible to participate fully in the pension plan offered by that business.

Another illustration of this would be if a CEO of a firm is eligible for stock options after two years on the job, but only on the condition that the company must have achieved a minimum twenty percent increase in revenue during that time period. In the field of cryptocurrencies, vesting may imply putting aside 25 percent of a project’s tokens and allowing team members to acquire them in stages over a vesting term of four years.

Kinds of Vesting

The goal of the vested tokens ties the distribution strategy, and particularly the tenure, to play a significant role. This takes us to the term “Cliff,” which refers to a periodic lock placed on tokens prior to the token vesting period and is the most commonly utilized one in vesting. Its principal customers are investors in private sales and startup financing. Now that the phrase is clear, the various types of vesting are as follows:

Linear Vesting

The distribution of tokens in equal and preset chunks over a predetermined period of time is known as linear vesting. The time frame might be anything from a few hours to many years.

Twisted Vesting

Twisted vesting is the distribution of tokens at random over a period of time. Time can be expressed in terms of days, weeks, months, or even years.

Milestone Vesting

Stock options and other equity grants are conditionally distributed through milestone vesting dependent on the accomplishment of specific milestones. It is possible to provide milestone-based vesting to consultants, advisors, and other sorts of employees in addition to workers.

Read also: What Is Metaverse?

The benefits of using cryptocurrency vesting

The following are some of the primary drivers behind the widespread adoption of vesting in blockchain-based projects:

  1. Rewarding the followers

    The first people to get involved in a project, regardless of whether they are the project’s founders, early employees, or investors, are the ones who are taking the most risk (given the extremely low rate of success in the cryptocurrency space), and they should be fairly compensated for their faith in the project’s potential. Because of this, projects typically reserve about 20 percent of the tokens for the team so that they may reap the rewards of their hard work in the event that the project is successful.

  2. Retaining current employees

    When employees are aware that they will be rewarded in the form of tokens at the conclusion of their vesting period, two things are guaranteed to occur: first, the employees will remain on the project until the end of the vesting period, and second, the employees will work harder to increase the value of the project (and, by extension, the token) so that their vested tokens amount to something substantial.

  3. Making sure there are no changes in the price

    When an initial coin offering (ICO) takes place, everyone who has a significant quantity of tokens will immediately feel the need to sell them. This results in a glut of tokens on the market, which drives down both the price of the token and the value of the project overall. The process of vesting assures that these “whales” will have the ability to sell when a predetermined amount of time has passed.

  4. A strategy to avoid rug pulls

    In the current environment of pump and dumps, we have witnessed an excessive number of entrepreneurs exiting their enterprises following an initial coin offering (ICO) and selling their tokens in bulk, leaving investors high and dry. That is a severe breach of the public’s confidence. If the founders are to get ultimate benefits, such rewards must be vested before they can be sold. This leaves the founders with little choice but to put in a lot of effort to guarantee that the project is successful.