1. What is cryptocurrency vesting?
The process of locking cryptocurrency coins or tokens for a predetermined period of time before allowing the coin holders full access or transfer is called crypto vesting.
It is commonly used in initial coin offerings (ICOs), token sales, and other cryptocurrency-related fundraising events. Cryptocurrency vesting is designed to incentivize long-term dedication and discourage early investors or team members from hastily selling tokens for a profit and then leaving the business. The person or entity that receives the tokens gradually gains access to them over time.
While vesting schedules can vary, they typically include a waiting period (known as a cliff) followed by a period of regular release. For example, tokens might have a one-year waiting period and then be released in equal monthly payments.
Attribution is often applied to:
Team and Advisors: To ensure continued commitment of team members and advisors to the project, tokens given to project developers may need to be vested.
Investors: Early investors in an ICO or token sale may also be subject to vesting periods to discourage short-term speculation.
Founders: In order to align their interests with the long-term performance of the project, the founders or core team members of the project may receive their tokens.
Typically, tokens are unlocked after a vesting period through various methods. During this process, tokens that were previously locked for a predetermined period of time are released. As a result of this unlocking, token holders can gradually access their assets over time, and this unlocking is usually done in stages or increments. Release conditions may include meeting milestones, time-based schedules, or achieving performance indicators.
Types of Cryptocurrency
Different types of vesting in the crypto space include time-based, milestone-based, hybrid, and reverse vesting.
Time-based attribution
With time-based vesting, tokens are gradually released to holders over a set period of time. For example, Ethereum implemented a time-based vesting system for its early supporters. Multiple publicly accessible smart contracts can gradually vest ERC-20 tokens, such as those allocated to founders in a crowdsale. Despite this, there is no equivalent method for vesting "original" Ethereum.
Raw Ethereum generally refers to the native cryptocurrency on the Ethereum blockchain in its unaltered state. It is different from representations of Ethereum on other blockchains, such as wrapped Ethereum or ERC-20 tokens on the Ethereum network.
Milestone-based vesting
With milestone-based vesting, token distribution depends on achieving specific project goals or benchmarks. Some blockchain projects may implement a vesting system based on milestones of their partners and team members.
For example, a percentage of allocated tokens may be distributed upon the successful implementation of a specific feature, the successful completion of a protocol update, or other notable project milestones.
Mixed cash vesting
Hybrid vesting combines elements of time-based and milestone-based vesting. Blockchain projects often adopt a hybrid vesting model for token distribution. A portion of the tokens allocated to the team and initial backers follow a time-based vesting schedule, gradually unlocking over a set period of time.
At the same time, the other part is related to the achievement of the project's predetermined milestones. This dual approach ensures alignment with project goals and recognizes long-term commitments and success milestones.
Reverse vesting
Under the concept of “reverse vesting,” tokens originally owned by a recipient may be forfeited if certain requirements are not met — the opposite of typical vesting.
Mining rewards are distributed on a schedule that promotes long-term network consistency: 25% of block rewards are released immediately to improve miner cash flow, and 75% of block rewards are gradually vested over 180 days. The Protocol Labs team and the Filecoin Foundation will receive additional Filecoin (FIL) tokens over six years, while SAFT investors will receive their tokens over three years.
3. Cryptocurrency Cashing and Traditional Financial Cashing Model
While cryptocurrency attribution leverages blockchain technology to enable transparency and automation, traditional financial attribution relies on centralized management to achieve similar goals within a traditional corporate framework.
The cryptocurrency attribution model has similarities to the traditional financial attribution model, but also exhibits unique characteristics due to the uniqueness of blockchain-based assets. In the cryptocurrency world, attribution is often accomplished through blockchain-based smart contracts that provide automated and transparent enforcement of attribution rules.
Aligning the interests of token holders such as investors, advisors, and project teams with the long-term growth and success of the project is the main goal of cryptocurrency vesting. In traditional finance, equity-based compensation plans, such as stock options and restricted stock units (RSUs), are often tied to vesting.
While traditional attribution methods are often managed by businesses and financial institutions through centralized systems, cryptocurrency attribution often uses smart contracts on decentralized platforms.
Time-based vesting in traditional finance typically requires a waiting period before an executive or employee fully owns the shares they have earned. This can improve employee retention and loyalty by tying a portion of an employee's salary to their continued employment. While milestone-based vesting is less common in traditional finance, it can occur in some performance-based stock plans, where shares are issued only after predetermined business goals are achieved.
4. How does cryptocurrency ownership affect supply?
Token vesting governs the gradual release of tokens into circulation, influencing available supply and market dynamics.
Token vesting directly affects the supply of tokens in circulation by controlling the supply of available tokens on the market over time. Tokens associated with vesting are generally not immediately available for trading or circulation.
Therefore, until these tokens are fully vested, they are not considered part of the available supply. The circulating supply decreases during the vesting period, which affects metrics such as market capitalization and available liquidity.
As tokens are gradually unlocked or vested according to a preset schedule or conditions, they enter the circulating supply. This can affect market dynamics, investor sentiment, and the supply and demand balance of the ecosystem.
5. Benefits of Cryptocurrency Vesting
Cryptocurrency vesting powered by smart contracts ensures that stakeholder interests are transparently, flexibly, and securely aligned with long-term project success, thereby enhancing investor confidence.
Cryptocurrency vesting offers multiple benefits in the blockchain space. By using smart contracts in a decentralized network, vesting requirements can be transparently and automatically enforced, thereby building trust among token holders.
Through time- and milestone-based vesting mechanisms, the interests of the team, advisors, and investors are aligned with the long-term success of the project. Because cryptocurrency vesting is so flexible, projects can customize the system to meet their unique requirements, thereby encouraging responsibility and dedication.
Furthermore, utilizing blockchain technology is immune to centralized manipulation and tampering, making the process more secure. All things considered, cryptocurrency vesting is essential to promote long-term project development, reduce speculative activities, and enhance investor confidence.
VI. Risks and Challenges Associated with Cryptocurrency Vesting
Regulatory uncertainty, smart contract vulnerabilities, liquidity risks, lack of standardization, and balancing incentives pose challenges to the effectiveness of cryptocurrency vesting.
Cashing out cryptocurrencies provides the necessary incentives, but also brings risks and difficulties. Regulatory uncertainty in the developing cryptocurrency ecosystem may give rise to legal issues that could affect the enforcement of vesting contracts.
Token holdings may be compromised by smart contract flaws and code errors, leading to unexpected results or security vulnerabilities. Once unlocked, liquidity risk of vested tokens may lead to sudden market volatility or even sell-offs.
Additionally, investors may be confused if the vesting procedures are not uniform between projects. Finding the ideal balance between recognizing dedication and ensuring the success of the project is an ongoing struggle. Overall, properly negotiating the complexities of cryptocurrency vesting requires careful consideration of legal, technical, and market-related issues.
