Token vesting involves gradually releasing cryptocurrency or token holdings to recipients across a timeframe. Blockchain projects commonly use this method to incentivize and secure lasting dedication from advisors, employees, founders, and developers.
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What Is Token Vesting?
Token vesting locks a specific token amount for a duration before releasing it to holders. This strategy, often adopted in cryptocurrency projects, encourages prolonged commitment from team members and investors.
Vesting can follow a linear or sigmoidal schedule, gradually or progressively releasing tokens over time.
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What Is Token Vesting And How Does It Relate To The Development Of Cryptocurrency Projects?
Token vesting is a practice involving the temporary locking of a specific token amount, with subsequent gradual release to holders.
Common in cryptocurrency projects, it encourages extended commitment from team members and investors.
Vesting can follow a linear, evenly-paced release or a sigmoidal pattern, starting fast and slowing over time.
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What Is The Token Vesting Process?
The token vesting process involves locking up a portion of tokens allocated to certain recipients for a predefined vesting period. The tokens are released gradually over time according to a vesting schedule. This prevents recipients from dumping their tokens and crashing the price.
Some common characteristics of token vesting include:
- Vesting duration – The period over which the tokens will be vested. This is usually 12 to 48 months.
- Vesting cliff – The period before any tokens are released. This is usually 3 to 12 months.
- Vesting schedule – The rate at which tokens are released after the cliff period. This can be linear, monthly, quarterly, etc.
- Locked and released tokens – The tokens are locked upfront and released based on the vesting schedule. The locked tokens cannot be transferred or traded until they are released.
The vesting contract controls the locked tokens until they are released to the recipient’s wallet as per the vesting terms. The recipient can only access vested tokens, protecting the project and other token holders against sudden dumps.
What Are The Different Types Of Token Vesting?
There are several common types of token vesting models:
In cliff vesting, the tokens are fully locked for an initial cliff period, after which they are released at regular intervals. For example, with a 12-month cliff and 24-month duration, 100% of tokens will be locked for 12 months and then released monthly over the next 24 months.
In linear vesting, the tokens are released at fixed intervals from the beginning. For example, with a 24-month linear vesting, 4.17% of tokens will be released each month for 24 months.
Here tokens are unlocked when specific milestones are achieved by the project. This helps align incentives for meeting development goals.
Hybrid vesting combines characteristics of the cliff and linear vesting. For example, there may be an initial 3-month cliff, followed by linear vesting over 2 years.
What Is Token Vesting For Employees?
Many blockchain projects use token vesting to retain employees and align their incentives with long-term success. Some ways it is implemented:
- Vesting as part of compensation – Tokens are allocated as part of the employee compensation package with vesting terms like 1-4 years.
- Vesting for employee tokens – If employees purchase tokens, those are also subject to vesting of usually 1 year.
- Performance-based vesting – Additional token grants may vest based on employee performance to reward and retain high performers.
- Accelerated vesting – Employees may get accelerated vesting as a retention incentive if they stay for a certain minimum period.
By vesting employee token grants over an extended period, companies can incentivize employees to stay invested in the project for the long run.
How Do You Implement Vesting?
Here are some steps to implement token vesting:
- Define vesting parameters – Cliff period, vesting duration, schedule etc. tailored to your goals.
- Code the vesting smart contract – To automate the locking and release of tokens per the vesting schedule.
- Generate vesting contracts – For each recipient, a vesting contract is generated based on the vesting terms.
- Deploy and audit contracts – Deploy the contracts on blockchain and audit for security, correctness, etc.
- Allocate locked tokens – Tokens allocated to a recipient are locked upfront in the vesting contract.
- Release vested tokens – The contract automatically releases a tranche of tokens that have vested to the recipient.
- Vesting dashboard – Build a user interface to show vesting schedules, locked and released tokens, etc.
The process requires upfront planning and programming of vesting logic. Vesting contracts should be audited before deploying them.
What Is An Example Of Vesting?
Here is an example vesting schedule:
- Total token grant – 1000 tokens
- Cliff period – 12 months
- Vesting duration – 48 months
- Vesting schedule – Monthly after cliff
So the vesting would be:
- Months 1-12 – Locked, no tokens released
- Months 13-48 – 21 tokens released monthly (1000/48 months = 20.83 tokens)
- Month 48 – Full 1000 tokens released
This ensures long-term commitment by not releasing any tokens for 1 year, followed by a gradual monthly schedule over the next 4 years.
What Is An Example Of A Vesting Scheme?
Here is an example of a startup implementing employee token vesting:
- Employees get hired and receive an ERC-20 token grant as compensation
- The tokens are subject to a 36-month vesting scheme with a 12-month cliff
- Employees vest 25% of their tokens after 12 months
- The remaining 75% of tokens vest monthly over the next 24 months
- If an employee leaves within 12 months, they get no tokens
- Leaving after 18 months, they get 25% of the grant vested after the initial cliff
- Staying for 36 months, they get the full grant amount vested
This scheme incentivizes employees to stay for the long-term success of the project. The gradual monthly vesting prevents sudden dumping and aligns with the company’s growth timeline.
How Does Token Vesting Work?
Tokens are locked for a set period before gradually becoming accessible, encouraging sustained involvement and commitment to cryptocurrency projects.
What Benefits Does Token Vesting Offer?
Token vesting encourages dedication, aligns incentives, and fosters trust among project stakeholders, ultimately contributing to the project’s success and growth.
In summary, token vesting aligns incentives between projects and key stakeholders by distributing tokens over an extended period. Different vesting models like cliffs, linear, milestone-based, and hybrid can be implemented using vesting smart contracts.
For employees, vesting structures retention and rewards long-term commitment to the project. Overall, vesting helps ensure stability and growth for blockchain ecosystems.