A Deep Dive Into Crypto Vesting: Schedules, Benefits & More

The crypto space is evolving fast, and longevity is not something that many of its niches can be proud of. That’s why there’s been an ongoing process of finding ways to keep both developers and investors accountable and foster long-term thinking and engagement. One such solution utilized by many projects to a certain degree of success has been crypto vesting.

While the term might sound complex and the act of crypto vesting reserved for only high-level investors, the basic principles behind it are relatively simple. Once you understand them, you can get on the ground floor alongside a start-up company and hopefully prosper with them.

So, let’s learn about crypto vesting, the different schedules, and the benefits of this approach to token release. Let’s get started!

What Is Crypto Vesting?

Crypto vesting is the process developers of new projects use to control the allocation and release of coins and tokens to the initial investors. It is a time-based procedure whose goal is to introduce new digital assets into circulation gradually. The main reason for this is to ensure the longevity of the project and prevent abrupt sell-offs or pump-and-dump schemes.

Vesting is not specific to the crypto sphere, as it has its roots in traditional finance (TradFi). Many companies use it to distribute their shares and stocks while maintaining their stability and preventing price drops.

Compared to TradFi, the DeFi space is much less regulated, leading to significantly more volatility and trouble with scams, frauds, and unsuccessful ICOs. Such an environment makes it difficult for investors to put their trust in projects and challenging for developers to gain funding for their startups.

Essentially, project developers create a vesting schedule before the fundraising for their project even begins. That way, they can ensure short-term investors can’t simply resell bought tokens for profit, thus quickly driving their price down. Instead, they are inclined to hold the assets until their full release, at which point the project should have matured.

Simply put, crypto vesting is an incentive mechanism created to foster commitment and stability. Only investors who believe in the project’s success will buy tokens they won’t be able to sell for extended periods of time.

How Does Crypto Vesting Work?

Crypto vesting works by utilizing smart contracts and the properties of blockchain. Smart contracts are pre-programmed scripts, programs, and sets of instructions designed to self-execute when the built-in conditions are met.

Developers use these smart contracts to create a secure and trustworthy system since these remove the need for a third party to govern token issuance and distribution. This process is further facilitated by the transparent and immutable blockchain, which stores records of all successful on-chain transactions and makes them permanent.

A typical crypto vesting process features a predetermined plan that dictates when and how many tokens are going to be distributed. This is called a crypto vesting schedule, and it generally consists of two parts, which are:

1. Cliff period, which refers to the lock-up period before any tokens are issued to the initial investors
2. Vesting period, which is when crypto assets are being gradually released

As an example, a cliff period of 12 months means that investors won’t receive a single token for a year after putting their funds into the project. After that, project developers might create a schedule that issues initial investors 25% of tokens every six months. That way, investors will receive the last batch of their tokens three years after the crypto vesting has started.

Simply put, investors are buying into the promise that the project will succeed, while smart contracts ensure they get their portion of crypto assets in a prearranged amount of time.

5 Benefits of Crypto Vesting

Cryptocurrency vesting brings many benefits to token issuers, their projects, and investors. Here are some of the most important ones:

1. Risk mitigation. Crypto vesting helps ease the minds of long-term investors who would otherwise be concerned about short-term project participants. Since nobody can dump tokens for a quick profit, there’s less risk of their price dropping soon after the ICO. A steady token issuance keeps their price more stable than if all were issued at once.
2. Cryptocurrency price stability. Apart from benefiting long-term investors, crypto vesting also helps steady the volatility of the project’s token. Using the basic economic principles of supply and demand, a rapid influx of new tokens lowers the demand, causing the price to drop. That can leave permanent consequences on new projects.
3. Investor commitment. One of the biggest reasons creators opt for crypto vesting is to ensure their project’s longevity. By preventing initial investors from quickly selling their tokens, they target cryptocurrency enthusiasts who want to see these projects succeed.
4. Employee retention. Many project owners include team members in the vesting process. In addition to regular salaries, employees gain a portion of tokens as compensation, similar to companies giving out stocks. This incentivizes all project participants to commit to staying with the company and working on the project’s success.
5. Fair and honest distribution. The use of blockchain and smart contracts creates a tamperproof system that neither developers nor investors can exploit. Still, the reliance on smart contracts necessitates thorough vetting and examination of these programs before they are implemented on a larger scale.

What Are Vesting Schedules?

Vesting schedules are the plans that dictate how long tokens will be locked up and how they will be released. These crypto vesting periods can be modified and adjusted to align with the project’s and management’s goals. But at their core, there are three main types of schedules, so let’s explore each one.

#1. Linear Vesting Schedule

A linear vesting schedule is when the issuer releases their tokens in equal installments at a constant rate and over a fixed period. For instance, the project can be programmed to award the vestee 10% of the allocated amount every 3 months, 25% every half a year, and so on.

This approach prevents holders from quickly selling a large number of tokens since they’ll only obtain them after the project’s been developed for some time. Furthermore, it stops the issuing company from selling its own holdings. Companies have to abide by the same vesting rules since they are dictated by smart contracts.

#2. Graded Vesting Schedule

A graded vesting schedule is a modified version of a linear schedule that features a gradual release of tokens. Simply put, each next installment of tokens can be higher or lower than the previous.

For example, vestees might get 15% of the tokens allocated for the initial coin offering after the first 3 months. The next payment can be six months later, featuring 45% of the tokens. In another 6 months, they might get the remaining 40%.

This type of schedule allows for more flexibility. It allows the issuers to tailor the vesting process to align with their needs and exact goals of their project.

#3. Cliff Vesting Schedule

A cliff vesting schedule relies on the initial cliff period in the vesting process, when the tokens are locked up. The issuers use a cliff phase to gather those who want to invest but remain in complete control of the token’s price since none of them are released to the market.

While a prolonged cliff period can result in long-term project stability, it can also deter investors from participating. They are required to put the funds in advance, and should they back out of the project before the cliff period ends, they get no tokens.

Who Is Involved in a Crypto Vesting Schedule?

The first party involved in a crypto vesting schedule is a company that issues tokens. The company’s team is the one deciding on the type of crypto vesting, meaning they are looking for ways to align it with the project and its goals.

The company should feature a clear roadmap for potential investors to spark their interest. Investors can then look at it and the whitepaper to gauge the project’s feasibility and determine whether they have a chance to succeed.

Should they decide to invest, the individuals and entities who participate in the vesting schedule become vestees. Vestees can be outside crypto enthusiasts and entities, such as retail investors and financial companies, but also company members, such as founders, developers, and managers.

As we already mentioned, crypto vesting is governed by autonomous smart contracts in most cases. That means there’s no need for third-party administrators to oversee the whole process and ensure its validity.

However, depending on the jurisdiction, some token vesting processes might be subjected to regulatory scrutiny by various tax and legal agencies, such as the IRS.

Vesting Crypto vs. Lockup

Crypto vesting and lockups share some similarities but are ultimately used for different purposes.

First off, crypto vesting features lockup mechanisms for the purposes of a gradual release of tokens. These lockup periods are usually determined by the project owners and exist under a specific schedule. The goal is to promote long-term project involvement and facilitate employee retention.

The goal of a crypto vesting lockup is to control the circulating supply, prevent sell-offs, and facilitate stability. Finally, the lockup (and the whole crypto vesting process, for that matter) fully ends once all the tokens have been issued.

A token lockup, regardless of crypto vesting, represents even higher levels of commitment to the project. It’s often performed by core team members and company employees eager to see their enterprise succeed.

The core team may lock up their holdings as a guarantee of their efforts, while outside investors who lock their assets up can gain additional benefits. Some of these benefits include:

• Making proposals about the project’s future
• Voting on suggestions regarding the development
• Delegating their votes to more knowledgeable and involved members
• Staking their assets to ensure the network’s stability and earn more tokens

How to Participate in Crypto Vesting

Anyone can participate in crypto vesting as long as they meet the minimum requirements. These requirements usually involve having the required amount of capital to invest. As a result, even small retail investors can join organizations that create investment pools, allowing anyone to buy tokens during the vesting period.

New companies usually market their projects through various means, including social media like X (former Twitter). Once you find an opportunity that grabs your attention, there are several steps you should take to maximize your chances of success, such as:

• Investigate the project by examining its whitepaper and roadmap. You should also take a look at the official website and social media pages to see if they are active. You can take it a step further and examine the team behind it. Some members might have been working on successful projects, while others could’ve been involved in scams.
• Analyze the tokenomics to try and predict the profitability of your investment. The act of vesting alone isn’t enough to prevent a cryptocurrency with bad tokenomics from suffering due to inflation or eventual sell-offs. Some of the key points to look out for are the capped maximum token supply and modest inflation after the vested period.
• Examine the network to look for its stability and viability in the current DeFi landscape. You should consider whether the project plans on featuring a proof-of-work, proof-of-stake, or some other consensus mechanism, how it plans to handle transactions and potential incidents, and so on.

On top of that, you can take various other factors into consideration, such as:

• Future liquidity
• Regulatory landscape
• Community feedback

Crypto Vesting Examples

Let’s take a look at some of the examples of crypto vesting:

• Polkadot network aims to be the bridge that connects incompatible blockchains. Its native token, DOT, follows a 6-year vesting schedule where the first year represents a cliff period. After that, initial investors can expect a monthly release for the next five years. This progress can be observed on the network’s crypto vesting tracker.
• Filecoin blockchain infrastructure aims to be the internet’s decentralized storage option. Its native token, FIL, is used to facilitate lending and purchasing storage space. The network features a hybrid model where a part of the tokens has been mined while the rest has been vested for 3 and 6 years to the outside investors and their teams, respectively.
• The Sandbox is a metaverse that features virtual land and digital assets. Holders of the SAND token can use it to purchase plots of land and participate in the internal economy. The tokens are issued with a 4-year vesting period, and team members can’t sell more than 20% of their tokens monthly.

Key Takeaways

Crypto vesting is a fairly new concept in the DeFi space. While there’s no Bitcoin vesting or Ethereum vesting, these are already stable networks with millions of users all over the world.

Vesting aims to improve the odds of startup blockchain projects and companies succeeding in this highly competitive and volatile environment. It’s a handy financial tool that boosts employer retention and increases investor confidence.

Its implementation highlights the development of the industry as a whole and its endeavors toward stability and security. Going forward, it’s likely that crypto vesting is going to evolve and see broader implementation as the ecosystem strives toward mainstream adoption.