Align incentives with a token linear vesting strategy
The rapid development and adoption of blockchain technology and DeFi has significantly supported the emergence of new types of organizations, projects and economies. These organizations, projects and economies, as they are built on a decentralized ecosystem, live thanks to their network and communities. Decentralized ecosystems lack central authority, what makes decision making and the control of the business and their moving parts a responsibility of each one of the stakeholders… But, how do we keep the interests of the community of stakeholders and the network aligned?
Background
In traditional private finance, to align the interests of the different stakeholders, organizations issue shares and rights to its founders, and also to key personnel or advisors, investors, and other stakeholders that could appear. But these shares or options are granted after a certain period of time (from 3 to 4 years), they are locked and released year after year, this process is called “vesting”. If they perform well, they will receive a proportional number of stocks, if they do not perform correctly, the company can deny the issuance of them. The people who own “stocks” are called the shareholders of the business and they have the right to contribute opinions to carry out certain activities of the company. If the business does well, they would potentially also receive a dividend each year, corresponding to a percentage of the shares they own.
In traditional public finance, individuals or companies can buy parts of the companies as public stocks, in different public stock markets. These stocks also give certain rights and privileges to their holders, and their price changes based on the supply and demand law… Companies to get public need to go through a thorough auditing process and present extensive documentation that would justify a stable business and with future, and are to be somehow “trust”.
In decentralized ecosystems, organizations and projects start as a traditional private finance company, but offering “tokens” as the stocks of a traditional public finance company. This really creates complex new economies, speculation and manipulation of the markets. Founders of these kinds of projects need to find ways to align the interests of their networks and communities to create a sustainable and long-term living organization and token economy.
One of the biggest challenges these projects face is the instability of the newly created currencies, they tend to issue more tokens that they should, or release them altogether, which floods the market with them, and lower the price significantly, causing the different stakeholders to doubt about their business, without giving them time to make it happen.
What is the token vesting process?
Several mechanisms have been appearing with the promise of protecting these economies, and one of the most well known is the “vesting”. Vesting works, as in private finance, by releasing X percentage of tokens every certain period of time, allowing the network to grow till a point where it can handle the amount of tokens that have been released, by being more established, by being able to show advances or new products, etc. However, these vesting strategies are also risky, because when the time comes, the economy can be affected by the flood of those unlocked tokens as well.
What is the linear token vesting process?
To protect the interests of the network and the community, a new way of vesting has arisen: the “linear token vesting”. Founding members, advisors, partners, and investors who participate in token economies will have their holdings tied to a linear vesting schedule. This means that at the end of the crowdfunding period, they will receive tokens corresponding to the amount they paid or contribute. For some projects they will issue a certain amount of tokens right away, while the other part of the tokens will be tied to the vesting schedule. Therefore, we can see many tokens are held by the stakeholders, and how many of them have been released.
So, initially to understand the interests of linear token vesting, we should go over some basic concepts of the token vesting process.
Normally, any investor who wants to support the project can contribute capital by purchasing the project’s tokens with Bitcoin, Ethereum or other cryptocurrencies. In return, they will receive tokens corresponding to the amount they purchased.
During the token release process, the token may be partially locked to protect and limit the supply to the market. In the lockup period of the token, no members of the business, partners, investors or other parties can access their tokens until the lock time expires. The locked amount of tokens is usually locked by the agreement on Smart Contracts until the un-lock conditions in the contract are met. The process of issuing these tokens is called “Vesting”.
The term linear vesting refers to a linear line showing the unlock percentage of tokens over the specified vesting time. We can look at a great example as follows: A Blockchain start-up can lock a certain amount of tokens as 15% of the tokens will be released gradually every month/quarter/year for financial purposes.
Locked tokens will not be listed or included in the circulating supply of the token. The project owners will release the amount of locked tokens in schedule according to the time and volume announced in advance, and the unlocked amount of tokens can be sold, transferred or given away…
In fact, the linear vesting process only applies to a few target groups such as founders, product development team members such as developers, marketers…, investors in the presale stage… without including the general investor. This means that these people are allowed to access and own this token, much earlier than general investors, who are only able to trade when the token starts releasing publicly on exchanges.
Why token vesting?
In essence, the process of locking and unlocking tokens is known as vesting. Token vesting restricts market price manipulation and creates a limited time commitment of investors to the project. Accordingly, those who buy tokens will devote their interest to the project and continue to work on its development to maintain the value of the token.
Usually, in practice, after crowdfunding events, there are massive sell-offs of tokens by the original investors or members of the project team that end up selling their tokens after Cryptocurrencies hit the market. The excess supply caused the token to rapidly decrease in value.
Why is token vesting beneficial?
It is easy to see that, if one or several investors own 20% of the total supply of the released token, they can easily create supply fluctuations that are detrimental to the ecosystem and the token price. In a word, this creates the risk of destabilizing the token. The token vesting process is implemented to prevent such risks and increase confidence in the potential of initial investors to hold the token.
Indeed, token linear vesting is an important strategy used by firms to increase focus on implementing a project after crowdfunding. Instead of receiving the entire token, investors, contributors, project members, partners… will be able to trade with tokens after a period of time according to the vesting schedule set by the founder of the project. By taking this way, the project member can neither give up the token nor leave the project. Businesses will receive the support and trust of advisors and partners.
The Vesting Process works similarly to a Central Bank reserve fund as businesses reserve locked tokens. The larger the amount in reserve, the stronger the currency, and conversely, the more cash on the market, the lower its value. One of the important things of the project is to clearly announce the allocation of tokens to founders, investors… so that they can identify the possibility of development as well as not control too many tokens. In addition, the linear vesting schedule should also be clearly communicated to the stakeholders.
Clearly, we can see how granting a certain number of tokens over a period of time can help a start-up project balance the token’s value and popularity. On the other hand, the increasing influence of external resources makes the trend of project management to be formed to retain a large amount of tokens to create motivation and interest in creating a thriving community with benefits for holders.
In conclusion, from the perspective of company founders and investors, the token linear vesting strategy is a great ideal to protect their interests. It helps in reducing the market price and ensures token value over time. Cryptocurrency investor groups are also very interested in specific projects to promote investors’ trust. The application of linear vesting strategy will help businesses grab these requirements of investors to motivate them to invest in the project.
About Dandelion Labs
Dandelion Labs is a blockchain product and research agency that leverages the power of blockchain technology. We support the businesses to create their projects in blockchain to power the next generation of decentralized commerce, paving the way for evolution and connection to the digital world.
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