Cryptonomics

What is Crypto Vesting

Vesting is a traditional concept, but in the crypto industry, it has a major effect on the price of the crypto asset.

Growing Long-Term Value

Crypto vesting is an integral part of tokenomics and has its roots in traditional finance. A good and balanced crypto vesting schedule manages price fluctuations and the overall integrity of the project.

Source: Most projects use a vesting schedule to manage selling pressure and prevent a significant dip in the price of the project’s token 

A portion of the project’s token supply subject to the ‘lockup period’ will be put aside over a specific period before distribution. A durational lock is called a ‘cliff’. The process of holding, locking, and releasing a project’s token from an Initial Coin Offering (ICO) is termed crypto vesting. 

Source: Participants in private funding rounds are one group of stakeholders who will receive the vested tokens once the lockup period ends.

Two groups of stakeholders will be the eventual recipients of the distribution after the lockup period. First are the early-stage investors that purchased the project’s token during the seed or private funding rounds. Secondly, members of the project team and its partners as incentives for their loyalty and contribution to the project. These stakeholders are subject to a crypto vesting schedule. 

How Vesting Schedule Works: 

A well-managed crypto startup usually sets aside approximately 20%-25% of its token supply for its management team. These tokens that were kept aside will be released in set intervals during the length of the vesting schedule. The tokens released during the vesting period are called ‘vested tokens.’ 

These intervals can be spread evenly to reduce selling pressure during the length of the vesting schedule. However, early-stage investors might be reluctant to invest in a crypto startup if the vesting schedule is too lengthy. 

Correlation Between Distribution and Token Price

It is important for any investor to be aware of any downside risk when vested tokens are released. Early investors would have purchased the vested tokens for a fraction of the current price and would likely sell the tokens as part of risk management.    

Therefore, any market participant needs to understand the difference between ‘total supply’ and ‘circulating supply.’ 

Source: The circulating supply is only a fraction of the total supply suggesting that there will be vested tokens will be unlocked in the future.

Investors should avoid huge unlocking schedules because heavy selling pressure will dampen positive price action. A good crypto vesting schedule is important for the project to grow and attract new investors and contributors. This has to be balanced against the interest of early investors and contributors who believed in the project and stood by it from its inception. 

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