By Welcome back to Fun with Tokenomics: A beginner’s guide. Today, we will delve into the next crucial aspect of tokenomics: the gradual release of tokens into the market. This is where “vesting” comes into play.
How Token Vesting Schedules Work
Have you ever questioned why some crypto tokens are not available right away after a project starts? Or why doesn’t the project team doesn’t sell all their tokens as soon as they can? Token vesting schedules are the reason why, and they are very important for a project’s success in the long run by ensuring that everyone has similar goals and motivations.
What is token vesting?
Token vesting refers to a schedule that releases locked tokens over a period. Instead of distributing all tokens at once, the tokens are unlocked gradually based on a plan.
It’s similar to employee stock options. An employee might be given stock, but they don’t own it from the start. The stock vests over time, where parts of the stock become theirs to keep or sell regularly. Token vesting works in a similar way in crypto.
It’s like telling your friend:
“I’ll give you 12 cupcakes, but you can only eat 1 every month for a year.”
Why Vesting Matters
Vesting schedules exist for a few key reasons:
They Align Incentives: Vesting makes sure that project teams, advisors, and early investors have a reason to see the project succeed over time, not just to make a fast profit. Selling off tokens early can negatively affect the project, which also hurts their investment.
They Prevent Market Dumps: Without vesting, many tokens held by founders or early investors could be sold right away. This could flood the market and cause the token’s price to crash.
They Build Trust and Stability: When investors know that many tokens are locked up for a while, it signals that the project is focused on steady, long-term growth.
Understanding a Vesting Schedule: What You Need to Know
Most vesting schedules consist of two primary elements:
The Cliff Period:
This is an initial period during which no tokens are released, even if the vesting period has technically begun.
Purpose: It acts as a commitment period. If a team member or advisor leaves before the cliff period ends, they typically forfeit all their unvested tokens. This ensures dedication and discourages short-term involvement.
Example: A common cliff period is 6 months or 1 year. If a team member has a 4-year vesting schedule with a 1-year cliff, they won’t receive any tokens for the first year. After the 1-year mark, a portion of their tokens (often 25% for a 4-year schedule) would typically unlock.
The Vesting Period:
This is the total duration over which the locked tokens are gradually unlocked after the cliff (if one exists).
Tokens are usually released linearly, meaning an equal amount is released at regular intervals (e.g., monthly, quarterly).
Example: Following a 1-year cliff, the remaining 75% of tokens might vest monthly over the next 3 years. So, after the first year, 25% unlocks, and then 1/36th of the remaining 75% unlocks each month for the subsequent 36 months.
Who Needs Vesting?
Vesting schedules usually involve:
Project Founders & Core Team: This keeps them invested in the project for the long haul.
Advisors: Their tokens should depend on their continued help.
Early Investors (Seed/Private Rounds): They get tokens cheap because they take on more risk. Vesting stops them from selling off their tokens right away for a quick profit once the token is available to the public.
Treasury/Ecosystem Funds (sometimes): These funds might release tokens on a schedule to pay for future work or rewards.
What to Look For in a Project’s Vesting Schedule
It’s important to understand a project’s vesting schedule when you are checking it out:
Longer Vesting & Cliff Periods: This usually means the team and early investors are dedicated. A short vesting period (like 6 months with no cliff) could mean a pump and dump situation.
Transparency: Good projects share their vesting schedules in their documents. If they don’t, that’s a bad sign.
Fairness: See how the team’s vesting schedule compares to early investors. If private investors can sell a lot of tokens right away, that can hurt the price.
In short, token vesting is a way to share tokens responsibly. It aids in keeping the market steady, and it encourages those involved in a project to stick around. It’s a critical piece of the tokenomics puzzle that every beginner should understand!
Key Takeaway for Beginners
Before buying a token, always check its vesting schedule on the project’s website, whitepaper, or trackers like TokenUnlocks.
If you understand vesting schedules, you can anticipate market moves instead of being surprised by sudden price drops.
When done right, vesting schedules are not limitations — they are the architecture of trust in token economies. They allow capital to flow where it is earned, protect the market from irrational volatility, and uphold the central moral principle of trade: value for value, over time.