Vesting : the Good Practices.

14 min readJan 15, 2024

This article has been produced by Nomiks, Web 3.0 firm specialised in Token Economics Design and monitoring.

In the world of tokenomics, the concept of vesting is fundamental, influencing project founders, investors and the crypto community as a whole. Vesting, or the gradual acquisition of rights to tokens, is a strategy that involves releasing tokens in stages rather than all at once.

Figure 1: This type of graph illustrates vesting over 48 months. It provides a clear visualization of the distribution of tokens over time according to certain “non-immediate” allocations (funding). We’ll return to this concept later in the article. The total supply is 100,000,000 tokens.

For the founders, vesting acts as a long-term commitment, building confidence and stability in the project. For the community, it promotes a fair distribution of tokens, encouraging more democratic participation. For investors, it provides protection against sudden market fluctuations, contributing to greater stability.

This practice of gradually acquiring rights to tokens not only regulates the distribution of tokens, but also plays a crucial role in the perception of a token’s value in the market. This has been understood by a platform like CoinMarketCap, which plays a key role in representing the circulating supply of tokens through a circulating supply calculation based on the information provided by its smart contracts. As a market tool, CoinMarketCap will interact with these vesting mechanisms, as the circulating supply is often seen as an indicator of a token’s scarcity and therefore potential value. If a large number of tokens are actually in the Vesting phase and therefore not yet circulating in the market, this may indicate a more limited supply and potentially higher value, while a massive release may indicate a future drop in value due to a sudden increase in supply.

The aim of this article is to provide a clear and thorough understanding of the strategic planning of vesting, based on at least three readability parameters that are all interrelated:

The anticipation of a token release from the side, especially to investors whose perception of dilution (i.e. the share of ownership of a token for a holder due to the issuance of new tokens) may influence behavior
The potential downward price impact of a sudden offering.
The perception of long-term value : while some stakeholders may perceive their dilution as negative in the short term, others may see it as necessary for the long-term growth and stability of the project (e.g. vested tokens for developers or strategic partners whose commitment is essential to the project’s success).Evolution of vesting calendars

Fundamental Principles of Vesting

Evolution of Vesting Calendars

At Nomiks, we’ve seen an evolution and recognized the need to adapt. Vesting schedules have adapted to the changing dynamics of the token market. Initially, vesting periods were short, reflecting a nascent, high-risk market. As the ecosystem matured, vesting periods became longer, reflecting a more strategic, long-term approach. Agreements between investors and founders have also evolved toward more sustainable and balanced practices. While in the early days, agreements were favorable to investors, with less stringent vesting clauses, there is now a demand from founders for more favorable terms for long-term commitment and a more balanced distribution of tokens.

Our experience has allowed us to confirm a notable correlation between cryptocurrency market cycles and financing terms, including vesting terms. During a bull market, token release terms can be more flexible, attracting more investors. Conversely, in a bear market, we have observed that vesting terms are often stricter, reflecting a more cautious, sustainability-oriented approach.

In general, we can say that vesting depends on the overall structure of the funding. But certain “externalities” must also be taken into account. Regulations in different countries can have a significant impact on vesting schedules. Legal and tax requirements, as well as compliance standards, may dictate the length and structure of vesting and blocking periods, necessitating adjustments to distribution strategies.

Time-Based Vesting or Event-driven vesting

There are several types of vesting models. Linear vesting is a form of token distribution in which rights to tokens are acquired progressively and uniformly over a fixed period of time. In this model, a fixed number of tokens become available to holders at regular intervals, such as monthly or annually, until all tokens are released. Tokens are not released in blocks on specific dates.

Event-driven vesting, on the other hand, is a mechanism by which token rights are released upon the occurrence of a specific event. Unlike linear vesting, which is continuous and predictable, this type of vesting waits for a triggering event to activate the release of tokens. Common examples include reaching a specific development milestone or achieving a goal (which may even be a funding goal). These events are often defined as part of the project’s growth strategy. This type of event-driven vesting can have a significant impact on the liquidity and stability of the token market. By concentrating the release of tokens around major events, it can cause liquidity and price fluctuations. This can be beneficial if the event increases the value and visibility of the project, but it can also lead to volatility if token holders decide to sell massively after an event.

We won’t be discussing such a release here, nor will we be discussing vesting that is driven by governance, for example.

Example of a vesting schedule

An example of a detailed vesting schedule for each allocation, with the number of tokens to be released at each time, is as follows (with a supply of 100,000,000 tokens):

| Category       | Ratio | Cliff | VDuration | UDuration | Total Tokens |
|----------------|-------|-------|-----------|-----------|--------------|
| Team-Founders  | 0.11  | 12    | 48        | 36        | 11000000     |
| Public         | 0.06  | 3     | 9         | 6         | 6000000      |
| Treasury       | 0.19  | 6     | 24        | 18        | 19000000     |
| Private        | 0.11  | 6     | 48        | 42        | 11000000     |
| Marketing      | 0.07  | 0     | 48        | 48        | 7000000      |
| Liquidity      | 0.06  | 0     | 1         | 1         | 6000000      |
| Incentives     | 0.30  | 0     | 1         | 1         | 30000000     |
| Airdrop        | 0.10  | 0     | 1         | 1         | 10000000     |

💡 Nota Bene n°1: Some allocations have their own peculiarities. Since we believe that they should be released at 100% of the TGE, we will not consider them here. These are:

Liquidity: This allocation corresponds to the number of tokens that will be used directly and exclusively for interlocking or a posteriori use, subject to the liquidity of the token.
Incentives (Rewards): This allocation represents the number of tokens used directly and exclusively for distributing incentives (i.e. rewards).
Airdrop: This allocation corresponds to a free distribution of tokens when certain conditions are met.

💡 Nota Bene n°2 about Cash Flow Vesting Risks: A project’s cash flow is critical to its operation and growth. It is often used to cover operational expenses (OpEx) and to respond to unforeseen events. When cash tokens are subject to vesting, it means that access to a significant portion of these funds is restricted for a period of time. While this can be beneficial in demonstrating the project’s long-term commitment and avoiding rapid dilution of the token’s value, it also carries risks:

Lack of liquidity for OpEx: If a large portion of the cash flow is tied up, the project may find itself without the necessary liquidity to cover ongoing operational expenses such as salaries, marketing, development, etc. This can hinder the project’s ability to grow and expand. This may affect the project’s ability to continue as a going concern. This can hinder the project’s ability to grow and respond effectively to market needs.
Inability to Respond to Unforeseen Events: Projects often face unforeseen challenges and opportunities. If a significant portion of cash flow is unavailable due to vesting, the project may not have the necessary funds to take advantage of new opportunities or navigate through difficult times.
Pressure to sell: When cash tokens become available after the vesting period, there may be pressure to sell them to cover accumulated expenses. This can lead to an increase in supply in the market and potentially a decrease in the token price.

To mitigate these risks, our software warns the user to plan his cash vesting class carefully to ensure that he maintains sufficient liquidity for operations and contingencies. He may also consider mechanisms such as reserve funds or lines of credit to supplement cash if necessary.

Dilution and Importance of the MC/FDV Ratio

Let’s assume (as a simple hypothesis) that a project owner has software to set all these vesting periods according to exit strategies (variable according to the allocations of his funding), how should this software be programmed?

It seems to us that this software should allow him to minimize dilution.

Figure 2 — Dilution according to the *circulating supply* method can be calculated as (1 — cum_schedule / cumsum) * cum_schedule / total_supply where cum_schedule is the cumulative sum of tokens released each month and cumsum is the total cumulative sum. total_supply = 100,000,000

Why is this? Because we believe that dilution is directly related to the problem of overstretching the potential price.

To understand this, let’s look at the (famous) MC/FDV ratio indicator. The ratio between Market Capitalization (MC) and Full Diluted Valuation (FDV) is a financial indicator for assessing the current and potential value of a token. MC represents the total market value of a cryptocurrency at a given point in time. It is calculated by multiplying the current price of the token by the number of tokens in circulation. Market capitalization reflects the public value and economic weight of a crypto-asset in the market at that moment. The FDV, on the other hand, is an estimate of the market value of a cryptocurrency if all expected tokens (the Max Supply) were in circulation and sold at the current price. This includes not only tokens already in circulation, but also those that are locked or awaiting release (such as those in the vesting period). The FDV therefore gives an idea of what the total market value could be if all planned tokens were available and purchased at the current price.

MC/FDV is therefore an indicator of a token’s potential dilution margin. A ratio close to 1 means that most of the expected tokens are already in circulation, indicating limited future dilution. Conversely, a ratio significantly below 1 indicates that a large portion of the total supply is not yet in circulation, indicating significant potential dilution as these tokens enter the market.

For investors, understanding this report will help them assess the potential dilution of a token. High future dilution can mean that the value of each token may decrease as supply increases, potentially impacting long-term returns.
For project owners, maintaining a balanced MC/FDV ratio is critical to managing market expectations and maintaining investor confidence. A well-planned token release strategy can help manage potential dilution and maintain a healthy valuation.

Over-expansion occurs when the price of a token rises far above its intrinsic or perceived value, and is often fueled by speculation and market enthusiasm rather than by solid fundamentals. Some market participants may be tempted to manipulate or use marketing strategies to drive the price of a token far above its intrinsic value in the hope of maximizing short-term profits. The MC/FDV ratio is closely related to this issue of overvaluation, as it can indicate or cause it:

Potential overvaluation: We have seen that a MC/FDV ratio well below 1 can indicate that a large portion of the total supply is not yet in circulation. But the token price will also play a role: if it rises rapidly due to speculation or other market factors, it may be the cause of an extremely high fully diluted valuation (FDV) compared to the current market capitalization (MC).
In cases where the MC/FDV ratio indicates significant overextension, the market may eventually experience a correction as the additional vested tokens come into circulation. This correction can be rapid and severe, especially if the token release coincides with other unfavorable market factors.

Optimal vesting software should therefore aim to minimize dilution by taking these possibilities into account. This would mean not only setting a token release schedule, but also understanding and anticipating the impact of the MC/FDV ratio and the impact of possible price overextension strategies.

In short, the ideal tool (but does it exist?) would serve to counteract (more or less intentional) over-extension strategies with a clear, structured and progressive timetable, allowing the project owner to control the magnitude of his dilution: too fast or too large a release could lead to an overabundance of tokens on the market (diluting the value of each token and potentially causing prices to fall), while conversely, too slow a release could hamper liquidity and hinder stakeholder commitment.

Market Strategies and Dilution Management: The Critical Role of Vesting

But there’s more.

In the dynamic and often volatile context of the crypto-asset market, dilution management and the impact of token releases are emerging as key issues for project owners and investors alike. In our view, vesting must involve a sophisticated understanding of market mechanisms and the behavior of economic agents.

It’s about navigating carefully through a complex ecosystem, where decisions about the extent of dilution require a considered and informed approach. In this context, vesting becomes an essential tool, not only for regulation, but also for a market strategy that borrows its style (and dangers) entirely from traditional finance.

Hedging Strategy …

Hedging strategies are used to protect against fluctuations in the price of an asset. Applied to the world of tokens, a hedging strategy consists, for example, of using perpetual markets where token holders can take positions to offset the risks associated with falling prices.

Let’s take a concrete example.

When tokens are released on a large scale, certain players in the financial markets adopt specific strategies to protect themselves or take advantage of price fluctuations. One common strategy is “delta-neutral,” where agents choose to short the token in proportion to the number of tokens they receive. This protects them from a potential drop in the price of the token, while allowing them to profit from the release of tokens. In extreme cases, if a large number of agents choose to short the market, this can create a situation where the total open interest in dollars exceeds the market capitalization of the token in spot. This price decorrelation between the spot and perpetual markets can lead to large funding and increased speculation, increasing volatility and risk for all market participants. The release of tokens and related strategies can lead to intense volatility in the token price, both up and down. Negative funding can result in large payouts on long positions, increasing volatility during these short periods. In addition, massive liquidations can occur, influencing price movements and creating opportunities for traders.

Metal (MTL) is an emblematic case of this particular situation where token releases and market strategies can influence price volatility and stability. By analyzing its charts of market capitalization, open interest, and spot and perpetual token prices, we can observe how token releases and market strategies do indeed influence price volatility and stability. When Metal had to make a significant token release, some holders decided to short the token to protect themselves from a potential price drop. This strategy contributed to some spot price stability, but also created a situation where open interest in the perpetual markets was high, increasing the risk of volatility and mass liquidation.

In short, if the amount of tokens released at any given time is less than the maximum open interest (OI) possible in the futures market, this can create an imbalance and potentially lead to a rapid price drop. This is a situation that needs to be taken into account in vesting, and which the Nomiks tool is designed to anticipate.

In our opinion, one way to avoid such a situation is to offer the project owner a well thought out vesting plan with enough tokens released at the time of the TGE (Token Generation Event) to ensure a certain level of liquidity.

.. and Turnover Management

If a large number of short-term holders plan to sell immediately after the vesting period ends, this could put downward pressure on the price. Long-term holders could then use hedging strategies to protect themselves against this potential decline. Projects must therefore not only consider the technical aspects of vesting and hedging, but also understand and influence the behavior of token holders to ensure long-term growth and stability.

Managing the turnover of economic agents refers to the way in which token holders enter and exit the market. Ideally, projects want a stable, committed investor base over the long term. In reality, however, token holders can range from short-term traders to long-term investors, each with different strategies and goals.

High turnover means that tokens change hands frequently. This can be due to short-term traders trying to profit from market volatility. While this can increase liquidity, it can also lead to greater volatility and potential dilution of value for long-term holders. Low turnover indicates that tokens are being held for longer periods of time. This can signal confidence in the project and a stable investor base.

However, it can also reduce liquidity in the secondary market. Strategic management may therefore include incentives for long-term holders, such as increased rewards or governance rights, or mechanisms to discourage rapid selling, such as penalties for early sale.

Extended vesting periods fit squarely within this strategic framework.

Over-The-Counter (OTC) Selling Options for Large Shareholders

An alternative strategy for managing dilution and maintaining market stability is to offer over-the-counter (OTC) put options to large holders of tokens. These options allow large holders, such as business angels or insiders, to sell their tokens directly to interested buyers without going through the public market. This approach helps avoid a massive sell-off in the secondary market, which could drive the token price down.

OTC solutions are particularly relevant when these key players hold a significant share of future tokens. A block release via OTC solutions is often strategically preferable to a staggered release over time to maintain balance and confidence in the ecosystem.

To avoid excessive dilution and negative impact on the secondary market, OTC put options are often used, especially when shock tolerance is high. OTC transactions avoid saturating the public market with sudden supply that could cause prices to fall rapidly. This strategy is particularly relevant for large token releases such as Oasis (ROSE) and Nym (NYM). By staggering the release of tokens and using OTC options for large holders, they were able to minimize the impact of dilution on the secondary market while ensuring a fair and transparent distribution of tokens.

The Art of Exit Strategy in Vesting.

In conclusion, Vesting is not simply a method of distributing tokens; it is a critical strategic element in the crypto asset space. A deep understanding and judicious implementation of vesting is essential to balance the needs of founders, investors and users within the dynamic crypto-asset ecosystem.

It is important not to underestimate the importance of exit strategies in this process. Ideally, exit options should be considered according to different allocation categories, identifying certain vesting classes (e.g. short term: 0–6 months, medium term: 0–18 months, long term: 0–48 months). This approach allows us to maintain a certain time frame that allows different players to exit without affecting the price. If a large number of tokens are sold quickly on the market, this can lead to an oversupply relative to demand, which tends to drive down the token price.

For example, the founding team would receive tokens with a cliff period of 12 months, followed by linear vesting over 36 months. This approach shows a long-term commitment and avoids massive selling that could destabilize the token price. Private investors, on the other hand, would only endure a 6-month cliff with the same extended vesting period; as for the public, a shorter 6-month vesting period and a reduced cliff will increase their commitment.

This type of multiple exit strategy illustrates how careful planning can align the interests of founders with those of investors and the community, thereby promoting long-term growth and stability, when combined with an objective function that smoothes the total dilution over all vesting periods taken together.

Ultimately, the goal of vesting and exit strategies is to strike a balance between meeting the short-term goals of token holders and preserving long-term value for the community as a whole.

We hope to have enriched the understanding of vesting, but also to have provided practical insights for market participants. A well-informed public helps to make crypto projects easier to understand and adopt, increasing the trust and stability of the entire ecosystem.

Spreading the word about our field is a long-term task that we approach with equal enthusiasm and diligence. Here are just a few examples for the reader’s reference: