Token vesting is the process of locking up a certain amount of the total tokens from circulation. These tokens are often released over an agreed period, which is usually over the years. Token vesting makes sure the core stakeholders of the project do not receive their rewards at once, thereby keeping them around to ensure the growth of the project.
Token vesting has its roots in traditional finance when companies often reward employees with stocks. However, if these employees sell their stocks massively, it can create selling pressure and negatively affect the company’s stock price. Therefore, companies usually employ vesting to delay the ownership and use of the promised assets. Token vesting in the crypto space also serves the same purpose.
Types of token vesting
There are 3 main types of token vesting: Linear, Graded, and Cliff Vesting.
Linear Vesting: is the allotment of the vested tokens in equal parts over a predefined period. For example, project A could have 20% paid in the first quarter, then another 20% in the following three months. This way, the entire allotment is paid off in a year and three months.
Graded Vesting: the vested tokens are released in grades, each higher or lesser than the last. A definite time gap between releases is placed in a graded vesting schedule. For example, 25% of the vested tokens can be paid out after the first six months; 10% in the next 3 months, and 25% in the next 4 months.
Cliff Vesting: is the period from the start of a vesting period to the transfer of the first set of tokens. No tokens are released in the cliff vesting schedule. Extended time frames are the norm in cliff vesting schedules and should you pull out your funds before the agreed date, you will lose all rights to the vested tokens. This reduces the likelihood of pump-and-dump attacks, where people buy in early into a token only to suddenly pull out, thus collapsing the value of the said token.
Benefits of token vesting
Lowers risk of manipulation
The first reason to employ token vesting is to lower risk of manipulation. Since tokens are locked, the development team will not be able to sell tokens to the market as soon as the crowdfunding period is over. Nor can they fiddle with the token supply by hoarding the tokens, creating artificial hyper scarcity. The lowered risk of market manipulation makes it easier to identify scams that generate valueless coins after obtaining funds from investors.
Fosters commitment
This mechanism is designed to ensure that the members of the development team, investors must stick with the project for a certain period of time to receive their full tokens.
Keep the token price stable
Token vesting helps distribute tokens such that a large proportion of the project’s tokens are not unduly held by a single person or a small number of people. This will reduce selling pressure from investors and the team, thereby keeping the token price stable.