The rising trend of blockchain-based technologies has spawned a whole new industry. Cryptocurrencies are gaining traction, and presently, the global crypto market cap is $979.94B. With such a high market cap, the potential opportunities are endless. Crypto refers to the technology of creating the digital currency, which relies on cryptography and blockchain. Cryptography is the science of keeping information private and secure, while blockchain is a digital ledger that is maintained by a peer-to-peer network. In this regard, these digital currencies are referred to as tokens or coins. This article will focus on a topic of interest to the blockchain community, i.e., crypto/token vesting.
Crypto or token vesting and blockchain startups
Crypto vesting is an arrangement where the company distributes a certain percentage of tokens to primary parties involved in the project; typically, it is done before the Initial Coin Offering (ICO) takes place. These tokens can be distributed to shareholders, management, founders, advisors, and others who have provided the project services. It is also known as a “lock-up” wherein usually, 20%-25% of tokens are allocated to all the necessary parties.
Thereafter, it is expected that the tokens will be fully released to the public after a period of time. This mechanism is designed to ensure that all individuals involved in the project will have their stakes aligned with the value of the token. On the other hand, blockchain startups are those that are driven by blockchain technology and help develop, enhance and maintain the blockchain ecosystem. These startups help build an ecosystem and implement blockchain applications, providing a decentralized digital currency platform.
What is crypto or token?
Crypto, token, or coin can be defined as a form of digital currency that relies on cryptography and blockchain to maintain its integrity. In recent years, the growth of this industry has led to the development of various kinds of digital tokens that are used as both a medium of exchange and a store of value. Bitcoin, Ethereum, Dogecoin, and Ripple are a few examples of these crypto/tokens. Each of these tokens has its own characteristics, such as the level of difficulty in mining, the total market cap, and the existence of a total supply.
The total supply of tokens is the number of tokens that will be available for people to use after the Initial Coin Offering (ICO) has been completed. While the value of these tokens is derived based on demand and supply, market sentiments, and news or events. The crypto or token offers a variety of benefits to investors, such as the ability to take advantage of significant volatility, access to profitable markets, and the opportunity to diversify their investment portfolio.
What is crypto/token vesting?
Crypto or token vesting can be defined as a process in which a certain percentage of tokens are distributed to the primary parties that have contributed to the project before the Initial Coin Offering (ICO). This arrangement is normally made in order to ensure the alignment of interests between all parties involved. The vesting period can be either a fixed or variable time period, depending on the project, agreement, and circumstances. As a matter of fact, it is more likely that these tokens will be released to the public after the end of the crypto vesting period.
Types of token vesting schedule
There are three types of token vesting schedules, i.e., linear, graded, and cliff vesting schedules. Following is a brief overview of each type:
- Linear vesting schedule – In this schedule, the vested tokens are distributed proportionally during the vesting period. This means that a certain number of tokens are distributed to the vested parties at a fixed interval during the vesting period. For instance, if 10% of the tokens are locked every 3 months with a total vesting period of 9 months, the vested party will receive the tokens in equal ratios. Hence, this vesting schedule is known as a “linear” method.
- Graded vesting schedule – In this type of vesting schedule, each period has a different token release ratio. Basically, it can be customized to each project individually according to the vested party’s needs. For example, 25% is to be released in the first 6 months, 10% in the next 3 months, and 25% in the following 4 months.
- Cliff vesting schedule – The cliff method is a period where no tokens are released at all. As such, it holds the token till the time cliff period ends. In order to better understand, let’s suppose the cliff period is for 3 months. Thereby, no tokens are to be released during the cliff period. After this period, the vested party will receive the tokens either in a linear or graded method, depending on the needs of the parties involved.
Benefits of token vesting
In simple terms, vesting in crypto is used to encourage the team members to work towards a mutually beneficial objective. Here are a few benefits of token vesting:
- Lower market manipulation – The first reason for implementing token vesting is to limit market manipulation. Since the vested tokens are locked, the team members will not be able to sell the tokens for a certain period of time. As such, this prevents the team from dumping the tokens into the market, thereby keeping the value of the token stable.
- Lets the team have enough time to develop the product – This mechanism is designed to ensure that the team members have the necessary time they need to develop the product and build a successful project. As such, it allows team members time to develop a winning strategy and stick with it throughout their project progress. Furthermore, it also ensures that the delivery of the product is on time and risk-free.
- Token stability – The token vesting system can provide tokens with a great deal of stability by giving project team members a vested interest in maintaining their value. This is because the vested tokens are locked for a period of time, limiting the ability of the team members to sell their tokens until they have vested.
- Lower risk of large entities – It can also be argued that the creation of a crypto vesting system can provide a certain degree of security to large entities from its competitors. Since the vested tokens will be locked for a certain period of time, this effectively limits the risk of a large entity dumping the tokens at an unreasonably low price in order to take advantage of market movements.
How can blockchain startups award the vested tokens?
In order to avoid the appearance of a conflict of interest, it is crucial that blockchain startups vest tokens through a proper and transparent process. Here are a few recommendations on how to award the vested tokens:
- Manual vesting – The process of awarding the vested tokens through a manual process is the simplest and most cost-effective method to use. It requires that the project team members manually allocate the vested tokens after their product has been completed and delivered successfully. It is important that the team members have enough time to allocate the tokens in a proper manner. After all, it takes time to develop and deliver a successful product.
- Automated vesting – If the project is able to handle millions of dollars, it is recommended that the project developers use an automated vesting process. Automated vesting can be implemented through third parties (token vesting platforms), wherein they are responsible for allocating the vested tokens to the project team members in a fair, transparent, and automated manner. As a result, this method of vesting will save time and a lot of effort on the part of the project team.
Do vesting periods only imply on investors?
No, vesting periods are not only limited to investors and can be used by backers as well. Backers are individuals or enterprises who provide funds in order to help strengthen the development of the project. In addition, consultants, advisors, and team members can also have their vested tokens.
The usage of a proper token vesting schedule is the most effective and efficient in order to develop a healthy project. However, investors play a crucial role in the development of a project because they are the ones who finance the project by offering funds. Therefore, all parties involved should be granted predefined vesting periods.
Token vesting and allocation of crypto/tokens
Vesting schedules provide a mechanism to allocate the tokens among the various parties involved in a project. Basically, the crypto/token vesting and allocation enables the project to allocate and release the vested tokens in a defined manner. The following are a few parties that should be considered when implementing a crypto/token vesting and allocation process:
- Core team – The core team of a project includes the team members, advisors, and consultants that drive the whole project. It is necessary that the project allocates a certain number of tokens to this group in order to ensure their continued support and involvement throughout the project’s lifetime.
- Investors – Angel investors, venture capitalists, and others who finance the project should receive a certain percentage of the tokens where they can be vested over a specified period of time. Financing plays a major role in the development of any project, and it is important that investors are rewarded adequately for their participation.
- Treasury or company – Decentralized Autonomous Organization (DAO), foundation, or company should be provided with a certain number of tokens that will be vested based on their role in the project’s development. They are usually responsible for handling operating expenses, conducting R&D, and providing support.
- Community distribution and incentive – In order to market the project, community distributors such as crypto experts, influencers, and others should be rewarded with a certain number of tokens. They will be responsible for marketing the project and ensuring that they attract more users.
- Public sales – Tokens distributed during public sales should be vested in the project developers over a specified period of time. This will ensure that the public sale participants receive their part of the share generated by the project.
- Other – Agencies, partners, contractors, and others who assist the project should be allotted tokens in a defined manner. These parties should be rewarded for their participation and efforts in the development of the project.
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Crypto vesting is a powerful tool and can be used effectively to ensure that a specific project is able to maintain its value over time. The system is transparent and simple to use, and it can help provide a strong foundation because all the parties involved will actively work towards the success of the project. Eqvista offers accurate crypto asset valuation. The team of experts, who are involved in the valuation of crypto assets, can help cryptocurrency companies with various stages on the way toward maturity. Visit Eqvista for more information.