What is Token Vesting?
The crypto space is growing super rapidly 🚄 and it seems every other day we are hearing about a new project launch that aims to solve real-world problems, but what about solving the project’s own real problem? 🤔 Let me explain…
Multiple projects have seen the light of day in a crypto bull-run and have disappeared into an abyss during a bear-market. Do you know the reason? It can mainly been attributed to the team dumping their tokens & moving on. Also, teams dumping their tokens and rugging investors is a very real thing in the Wild Wild West of Crypto.
This is where Token Vesting enters the scene (will explain more in details below) and this is what Streamflow as a platform aims to solve.
The following deep dive will not only aim to cover everything there is to know about Streamflow, but we will also discuss the importance of vesting, cliff periods and use actual projects to understand the significance of Token Vesting contracts in Crypto.
Understanding Token Vesting & Cliff ⏱
The term Vesting originates from the Latin word “vestire.” Putting it into more simpler terms, vestire refers to the act of putting an asset in the custody of a 3rd party.
I know the term VESTING might sound very crypto-native and leave you dazed 😵💫, but hold on, I will break it down to even more simpler terms. Token Vesting is nothing more than a Lockup period for project tokens that were part of an ICO (Initial Coin Offering), IDO (Initial Dex Offering) &/or a part of token allocation to the team/partners/venture capitalists.
Vesting can be further divided into two broad categories:
Linear Vesting: Under this method of distribution, tokens are released in a linear manner or simply put, released in equal parts.
For example, Project XYZ has vested 100,000 tokens for its team. Under linear vesting mode, 10,000 project tokens can be unlocked monthly, which will complete the entire vesting schedule over a span of 10 months.
Twisted Vesting: Under this method of distribution, tokens are unlocked in random parts within a particular time-frame.
For example, Project XYZ has vested 100,000 tokens for its team. Under twisted vesting mode, 20% of 100,000 project tokens can be released monthly for 3 months and the remaining 80% tokens can be released following a 9 months cliff.
I will cover both types of vesting methods with real-life project examples a little further down in the article.
“Ser, then what is Cliff?”
Cliff is nothing but a fancy term to explain the duration period of the vested tokens.
Now lets get to the more crucial question below:
So why is Vesting required? 😶🌫️
You see, every project needs some kind of funding 💰 to sustain, launch, grow and distribute. All of these things require liquid funds that can be deployed by the team on immediate basis. But where does this funding come from? They can come from multiple sources, but we will talk about the 2 most prominent sources of funding:
- Venture Capitalists &/or Partners
- Private sale rounds
Now, Venture Capitalists are the hardcore numbers people — they will invest in a potential project that would give them an absolutely explosive returns over their initial funding. But as most things in life, this initial funding comes in with certain conditions as well. A venture capitalist pouring in cash into a project team coffers demands some form of immediate return…this is where the project ends up allocating a percentage of their total available tokens to secure funding.
Lets take some hardcore data into account to understand better:
The above data has been taken from Mesari.io and it shows some prominent token allocations to different types of investor class:
- Public Sale
- Community Allocations
- Insiders (Venture Capitalist, Partners & Team)
For the purpose of our deep dive, we will focus on the 3rd investor class and the graph above represents the investor class allocation in pink (DO NOT quote me on the colour shade )
The perfect example for our study will be Internet Computer ($ICP) :
The above image says that Internet Computer had allocated 39% of their token supply to Venture Capitalists, Partners & Team. $ICP total tokens data:
Guess what happened when the tokens were listed on Centralised Exchanges simultaneously? 👇
As you can see in the chart above, $ICP dumped BIG TIME after the initial CEX listings and has lost over -99% of its value today since its listing price.
Brain Teaser for the day: Who could have dumped these tokens on listing, when retail had no access ⛔️to the project? 🤯
Yeah, it was the Venture Capitalists & Project Insiders! This entire massacre is to be blamed on an absolutely horrible token distribution model adopted by Dfinity (developer of Internet Computer) An excerpt below from Arkham Intelligence
“Our analysis has led us to believe that possible insiders connected to Dfinity have been dumping billions of dollars of ICP on exchanges at the expense of small early supporters and retail investors.”
So, could this have been avoided?
Absolutely. If the project team of $ICP had been more dilligent and deployed a proper token vesting schedule with a predefined cliff period & scheduled percentage unlock of the tokens — then this preventive measure would have absolutely saved the project from this ugly dump.
Need of Token Vesting from a Security POV :
Now that we have gained knowledge about Token Vesting and its relevance in modern day crypto space — Let us now try to see the NEED of Token Vesting through the lens of Cyber Security.
If past Security Breaches in the crypto space are revisited, the data will have you gasping for breath due to sheer volume of the funds lost FOREVER.
23rd March, 2022 witnessed the largest crypto hacks to have ever taken place in the historical existence of the Crypto space — A cumulative loss of $625 million in ETH drained from the Ronin network, crippling the Axie Infinity ecosystem.
If the team of Axie Infinity would have deployed a token vesting contract with a solid release plan, then the smart contracts would have been more difficult to hack. In todays time, when crypto is growing and hacking has become even more sophisticated, Token Vesting is the need of the hour.
A huge thank you to CoinDCX for giving me this opportunity to write such a detailed report and be a part of the #CoinDCXpathbreaker program, enabling me to share such knowledge with everyone in the crypto space.
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