How Token Unlocking and Vesting Schedule Shapes Crypto Projects
In the exciting world of cryptocurrency, “token unlocking” is a term you’ll often come across. It’s like opening a treasure chest and waiting for the right time. When a new digital coin is born through an Initial Coin Offering (ICO) or token sale, it’s not immediately set free. Instead, these tokens are scheduled for a grand entrance into the market. This schedule is known as the token unlock schedule.
In this blog, we’ll take a friendly stroll through the landscape of token unlocking. We’ll understand what it means, learn about the different types of unlock schedules, and see how they can impact the price of the token. So, let’s get started on this easy-to-understand yet comprehensive guide to token unlocking.
What is Token Vesting?
Token vesting is like a slow gift-giving process. Instead of getting all your tokens at once, you receive them bit by bit over time or when certain goals are met. This could be over a set period, like getting a portion of your monthly tokens. Or, it could be based on specific goals or milestones being achieved, like completing a project phase or reaching a certain number of users.
This process ensures a smooth and steady flow of tokens into the market. It’s like a tap that’s opened just enough to maintain a steady stream, preventing any sudden gush or trickle. This method helps avoid any abrupt sell-offs that could happen if everyone decided to sell their tokens at once. It also ensures fair play in the market, making it difficult for anyone to manipulate the token price. So, token vesting not only benefits the token holders but also contributes to the overall health and stability of the cryptocurrency market.
Purpose of Token Vesting
Token vesting is like a pact, a commitment that everyone involved in a project makes. It’s a way to ensure that all the stakeholders, which includes the team working on the project and the investors who have put their money into it, are in it for the long run.
Think of it as a pie being served piece by piece over time rather than all at once. This way, everyone gets to savor the pie slowly and for a longer time. In the context of a project, this means that tokens, which are like pieces of this pie, are given out gradually. This keeps everyone from gobbling up their piece quickly, i.e., selling all their tokens for a quick profit, and then leaving the table, i.e., the project.
Instead, this slow serving encourages everyone to stay at the table longer, enjoy the pie, and contribute to the baking of more pies, i.e., the growth and success of the project. So, token vesting is a crucial recipe in the cookbook of cryptocurrency projects, ensuring that everyone’s interests are aligned, and the project is set on the path of long-term success.
Now, let’s talk about a vesting schedule. This is a special kind of token unlock schedule. It’s like a timetable that shows when tokens will be given out over a certain period. This type of schedule is often used when tokens are given to the people who are closely involved with the project, like the team members, advisors, or founders. The tokens are given out at regular intervals, like every month or every quarter, until all the tokens have been handed out.
Understanding these schedules can sometimes feel like solving a puzzle, as they can have different levels of unlocking, different vesting periods, and different release schedules. That’s why investors need to take a close look at the vesting schedule. It’s like reading the fine print before buying something – it helps you understand how the token price might change over time.
Types of Vesting schedule
Time-based (linear and cliff)
A time-based vesting schedule is like a clock that ticks away, releasing tokens as time passes. This can be linear, where tokens are given out evenly over time, just like the steady ticking of a clock. Or it can be cliff-based, where a bunch of tokens are given out all at once after a certain time, just like the alarm of a clock that rings at a set time. For instance, an investor might get 25% of the tokens upfront, with the remaining 75% spread out over three years. It’s important to keep track of the timeline and the percentage of tokens released at each interval.
Milestone-based vesting is like a treasure hunt. Tokens are given out when the project hits certain goals or milestones, just like finding a treasure when you reach a certain spot in the hunt. This could be when a new product is launched, a certain number of users is reached, or any other big win for the project.
A combination of both
Some projects are like a clock and a treasure hunt combined. They use both time and milestone-based vesting. This gives them more flexibility and makes sure that tokens are given out based on both the time spent on the project and how well the project is doing. It’s like getting a treasure not just for reaching a spot but also for the time spent in the hunt.
Token unlock schedule
A token unlock schedule is like a calendar that tells us when tokens will be released into the market. It’s a plan that’s decided ahead of time, and it includes a lockup period. This is a timeframe during which the tokens are kept with the project team and not released. The length of this period can vary – it could be a few months or even several years, depending on the terms of the token sale.
Impact of token unlocking on price
When tokens are unlocked, it’s like opening a dam gate. If a lot of tokens are released all at once, it can flood the market. This can lead to an oversupply of tokens, which means there are more tokens available than people want to buy. When this happens, the price of the token can drop.
But, just like a dam, the impact of token unlocking on the price can be controlled. If the project team has a good token vesting schedule and the project is doing well, the demand for the token might stay high. Even when more tokens are released, people might still be lining up to buy them. In this case, the token price might not drop much.
Real-life case studies
Here are some real-life examples of how token unlocking has impacted the price of various cryptocurrencies:
Axie Infinity (AXS): On October 20th, Axie Infinity, a prominent Play-to-Earn project, released 15.1 million AXS tokens, representing 11.5% of its circulating supply. This substantial release was met with a positive response from the Axie community, as evidenced by the subsequent upward trend in the token’s price. The community’s favourable response suggests that they are confident in the project’s long-term prospects and are willing to hold onto their AXS tokens.
Optimism (OP): On October 30th, Optimism, a leading Ethereum Layer 2 solution, released 24.2 million OP tokens, constituting 3% of its circulating supply. Following this release, the OP token experienced temporary fluctuations but quickly resumed its upward trajectory, demonstrating the project’s strong community support and confidence in its long-term viability.
Aptos (APT): Aptos experienced a token unlock on October 12th. Notably, following a preceding unlock in September, the APT token exhibited a value appreciation of 7%. The marginal difference in price between the prior and upcoming unlocks underscored the market’s stable response to the token release. The token price remained relatively stable until Aptos unveiled its popular NFT-based platform, Graffio.
Immutable X (IMX): On October 7th, Immutable X unlocked a total of 18,080,000 IMX tokens, primarily distributed to developers and participants from the private fundraising round. This substantial token release initially exerted downward pressure on the IMX token’s price, causing a notable downtrend for several weeks. However, a group of large investors accumulated a significant amount of IMX tokens, triggering an upward trend that reversed the initial price decline.
Sui (SUI): On October 3rd, Sui unlocked 34,620,000 tokens, a significant release that represented 4% of the circulating supply. Despite the project’s strong backing from prominent investors, including Binance, the token faced immediate selling pressure, leading to a continuous downward trend for two consecutive weeks. This price decline could be attributed to the increased supply of tokens entering the market rather than their demand, as investors who had been holding their tokens until the unlock event may have decided to sell a portion of their holdings.
In conclusion, token vesting and unlocking are like the heartbeat of crypto projects. They keep the project alive and healthy by ensuring a steady flow of tokens and aligning the interests of everyone involved. Just like a heartbeat maintains the rhythm of life, token vesting and unlocking maintain the rhythm of the project. They ensure that tokens are released in a controlled manner, preventing any sudden shocks to the system. By doing so, they contribute to the long-term success and stability of the project. So, whether you’re an investor, a project team member, or a casual observer, understanding token vesting and unlocking is crucial to understanding the pulse of a crypto project.