A basic understanding of vesting is essential for anyone interested in delving deeper into the world of cryptocurrency. By definition, vesting refers to the process by which an individual gains ownership of something - typically securities or assets - over time. In the context of crypto, a vesting period is generally outlined to maintain and grow stakeholder confidence, prevent fraud, and ensure long-term commitment from team members.
The vesting schedule's length and structure will vary depending on the project or company in question. However, it is generally understood that vesting periods last anywhere from several months to several years. For all these reasons and more, vesting plays an integral role in many aspects of the crypto industry - particularly when it comes to managing risk and maintaining healthy community dynamics.
Why is crypto vesting important?
Vesting is an essential concept in the cryptocurrency world for a few reasons. First, it helps to ensure that team members are committed to a project for the long term, which is essential for any successful cryptocurrency project. Having team members vest their tokens over time ensures they will be around for the long haul.
Second, vesting can help to align incentives between team members and investors. By tying up tokens for a set period, vesting schedules help ensure that employees or investors are committed to the startup for the long term. This alignment of interests is essential for any successful cryptocurrency project.
Vesting for investors
The project team is doing everything possible to keep investors' prices stable. This includes limiting how many tokens certain people will be able to receive at once in order not to have too much liquidity flooding onto the market. As this creates inflation and volatility.
Implementing vesting schedules has been one-way crypto projects combat pump-and-dump activity by hindering investors from selling all their coins within minutes or days after acquiring them.
Vesting for team members
A lockup period is typically used in the defi ecosystem to minimize rug pull risk. Nevertheless, Its primary purpose is usually to incentivize employees to stay with a project and have a role in its success. Oftentimes, team members assume more personal risks at a project's beginning by having lower salaries and less security. If the project does well, these individuals will be rewarded as they vest and can claim the project’s tokens over time.
What is a vesting schedule?
A vesting schedule is when an investor or employee earns the right to receive their tokens. Once vested, the investor is entitled to get tokens at a set price, regardless of the current market value. Vesting schedules are often used as a tool to motivate and retain investors and employees.
For example, suppose an investor is granted 1000 tokens with a four-year vesting period. This means the employee will vest 250 tokens annually for four years. By tying up tokens for a set period, vesting schedules help ensure that employees or investors are committed to a project for the long term.
They also help to align interests since holders of unvested tokens will be motivated to see the project succeed to maximize their investment. Token vesting is an essential tool that can help team members stay committed and aligned with the success of a project.
What is a vesting period?
A vesting period is a period of time during which an employee or investor accumulates tokens. After the vesting period has elapsed, the employee or investor is said to be fully vested.
Vesting periods help to ensure that employees and investors remain with a company long enough to receive the total value of their benefits. As a result, vesting periods are essential to many employee compensation packages.
For employees working in the blockchain space, it’s normal to have a vesting period that lasts 4 years.
For early investors, the average vesting period is 2 years. In the end, you’ll have 100% of your vested tokens.
Let's look at an example
Let’s use our new knowledge to look at a very common vesting setup and dig into what it actually means.
10% on TGE, one-year cliff, monthly linear vesting for a total of 2 years.
For the example above, 10% of the total tokens get distributed on the token generation event.
After that, you get 45% of the tokens one year later. A cliff means you get nothing until the end of the cliff period, which in this example is one year. Think of it as a token lockup.
After the cliff, you will receive tokens monthly. And it’s linear. Meaning it’s an even payout of the remaining 45% of the tokens for the next 12 months.
Totaling up to a vesting period of 2 years.
How do you set up token vesting?
There are a few different ways to set up token vesting. The most common way is to use a smart contract. Smart contracts can be used to automate many different kinds of transactions, including token vesting.
If you want it tied in with cap table management and more, the most common method is to use Presail. If you want to distribute tokens once, a service such as Disperse.app and Bulksender are excellent choices.
To summarize, we’ve gone through why vesting is essential for the team and investors. The definition of a vesting period and vesting schedule. And reviewed a classic setup. You’ve also got a brief introduction on what to do if you need to set up token vesting yourself.