Navigating Vesting in Crypto: Token Distribution Explained
The token distribution process among investors, known as vesting, plays a pivotal role in stabilizing an asset's value and fostering project loyalty. Properly executed vesting can mitigate or even eliminate the impact of price fluctuations triggered by unlocking events, when early investors and ICO participants are rallying to realize their profits.
Vesting orchestrates the transfer of tokens to various investor groups, setting timelines for their partial and complete unlock. It's integral to ICOs, token sales, and other fundraising initiatives.
Vesting entails lock-up phases (cliff) and token distribution phases. For example, Meson project's team will receive MSN tokens over an 8-year period, starting six months post-Token Generation Event (TGE). Vesting is not limited to project teams but also extends to:
Smart contracts ensure vesting adherence, acting as intermediaries between the project and token holders. After the lock-up phase, smart contracts automatically begin distributing assets to the designated addresses.
Hybrid Vesting. This method blends aspects of both time-based and milestone-based vesting. For ICO participants, tokens are time-distributed, whereas, for the team, it's milestone-dependent.
Reverse Vesting. Allocation holders might forfeit tokens, either wholly or partially, if certain conditions aren't met. This is more common in traditional markets, where a company can repurchase tokens from departing employees.
Linear and periodic vesting are also prevalent. Linear vesting involves continuous distribution over a set period, while periodic vesting happens at regular intervals (monthly, quarterly, yearly).
These allocations, especially those prone to immediate selling upon release, can significantly impact the token's price. If the market fails to absorb these additional tokens due to a lack of buy orders, it could lead to a substantial drop in the token's value.
Take the Aptos project, for instance. Over three months, it evenly distributed 74.5 million APT tokens, amounting to 7.44% of its total supply. These tokens were unlocked monthly, on the 12th of each month, and allocated to key investors, the community, and the project's fund.
This schedule of unlocks saw notable price fluctuations: an 18.7% decrease in November, 18.5% in December, and 13% in January, averaging a dip of about 16.7%.
Conversely, when tokens remain with their holders during the vesting period, it prevents a flood of sell orders, maintaining a level of price stability. Any additional market purchases during this time can even cause the price to rise.
Filecoin: A decentralized data storage network, vests its mining tokens to sustain network robustness. Here, 75% of the mining rewards per block are gradually distributed over 180 days, while the remaining 25% are instantly available to miners.
Avalanche: Reserved 10% of the total AVAX supply for its team. Following an initial three-month lock-up, the tokens are vested over 15 quarterly periods.
The primary risk lies in the vulnerability of smart contracts. Since token distribution is governed algorithmically, any breach could compromise the entire process. In the best-case scenario, this results in premature token access, but at worst, it can lead to cryptocurrency theft.
Vesting entails lock-up phases (cliff) and token distribution phases. For example, Meson project's team will receive MSN tokens over an 8-year period, starting six months post-Token Generation Event (TGE). Vesting is not limited to project teams but also extends to:
- Investors;
- Active project contributors;
- Testnet users.
Smart contracts ensure vesting adherence, acting as intermediaries between the project and token holders. After the lock-up phase, smart contracts automatically begin distributing assets to the designated addresses.
Types of Vesting
Time-Based Vesting. Tokens are allocated over a specific time frame. Decentralized exchange dYdX utilized this method for its investors, early users, and token holders.
DYDX token allocation graph. Source: coingecko.com
Milestone-Based Vesting. Token distribution hinges on reaching project roadmap goals and key milestones. For example, when the token is listed on an exchange, network updates occur, or other crucial events take place, the team will be entitled to 10% of their assets.
Hybrid Vesting. This method blends aspects of both time-based and milestone-based vesting. For ICO participants, tokens are time-distributed, whereas, for the team, it's milestone-dependent.
Reverse Vesting. Allocation holders might forfeit tokens, either wholly or partially, if certain conditions aren't met. This is more common in traditional markets, where a company can repurchase tokens from departing employees.
Linear and periodic vesting are also prevalent. Linear vesting involves continuous distribution over a set period, while periodic vesting happens at regular intervals (monthly, quarterly, yearly).
Vesting's Impact on Token Price
Cryptocurrency projects strategically allocate tokens across various directions, such as providing liquidity, rewarding miners, and other vital operational aspects.
These allocations, especially those prone to immediate selling upon release, can significantly impact the token's price. If the market fails to absorb these additional tokens due to a lack of buy orders, it could lead to a substantial drop in the token's value.
Take the Aptos project, for instance. Over three months, it evenly distributed 74.5 million APT tokens, amounting to 7.44% of its total supply. These tokens were unlocked monthly, on the 12th of each month, and allocated to key investors, the community, and the project's fund.
This schedule of unlocks saw notable price fluctuations: an 18.7% decrease in November, 18.5% in December, and 13% in January, averaging a dip of about 16.7%.
Correlation of APT vesting with its market value. Source: tradingview.com
Vesting serves as a crucial mechanism to moderate such effects. Without the phased distribution of tokens, the asset's price might have experienced even more significant drops. By imposing limitations on the volume of tokens that various stakeholder groups can sell at any given time, projects can soften the potential negative impact on their tokenβs price.
Conversely, when tokens remain with their holders during the vesting period, it prevents a flood of sell orders, maintaining a level of price stability. Any additional market purchases during this time can even cause the price to rise.
Vesting in Action: Real-World Projects
Polkadot: Allocated 30% of its DOT tokens to the Web3 Foundation, overseeing the blockchain's development and support. These tokens are vested over a period of six years, with monthly distributions starting six months after the Token Generation Event (TGE).
Filecoin: A decentralized data storage network, vests its mining tokens to sustain network robustness. Here, 75% of the mining rewards per block are gradually distributed over 180 days, while the remaining 25% are instantly available to miners.
Avalanche: Reserved 10% of the total AVAX supply for its team. Following an initial three-month lock-up, the tokens are vested over 15 quarterly periods.
Conclusion: Vesting-Related Challenges
Cryptocurrency vesting effectively curbs mass selling by early investors, ICO participants, and speculative traders. It also incentivizes the project team to remain committed, as a part of their token allocation remains locked. However, despite these benefits, vesting introduces certain risks and complexities.
The primary risk lies in the vulnerability of smart contracts. Since token distribution is governed algorithmically, any breach could compromise the entire process. In the best-case scenario, this results in premature token access, but at worst, it can lead to cryptocurrency theft.
