What is Token Vesting?
Investors that understand token vesting schedules can make better investment decisions in the long run.
If you’ve ever participated in an early-stage token sale, you’ve come across the term vesting or token vesting. The term is very familiar in investment circles in both traditional and crypto investment opportunities.
Vesting means a planned release of ownership (of tokens) from the project or company to the investor.
In other words, as it relates to cryptocurrency projects, it means that the token an investor has purchased in an early-stage round will be released into the custody of the investor at a predetermined schedule.
Typically vesting rules look like the following example:
15% at TGE, monthly unlocks for the next 5 months.
The example is saying that 15% of the expected tokens will be released on the Token Generation Event (TGE), with the rest of the tokens becoming available to the investor in equal parts over the next 5 months.
In the example above, the monthly vesting past the TGE would account for 17% of the total, eventually completely covering the entire token amount purchased by the investor in the beginning.
Side-note: Even though TGE means “Token Generation Event” this usually doesn’t mean that tokens are released at the exact moment the token is minted.
Back in 2017, tokens were minted as users participated in an IDO, but in recent times, IDOs are usually independent of the team, and as such the TGE nomenclature simply means the first-moment tokens are publicly available.
Why is vesting important?
Cryptocurrency investors look at a project’s tokenomics and deal offer to identify whether the terms work for them before they make an investment decision. Vesting will determine what kinds of returns a project needs to make before the investor break even on his investment.
The investor side
The ideal situation for any investor is to break even on TGE, but this depends on a lot of factors, particularly market sentiment. Depending on whether you are in a bull or bear market, the decision-making process will be different.
Regarding the project in the example, in order for it to generate a break-even for investors, the token price needs to appreciate approximately 6.6x, otherwise, the investor may need to sell at a price that only partly covers his or her investment.
Depending on the current market sentiment, this will either be a reasonable or a highly improbable target.
The project side
Looking at vesting from the project side, it’s an important buffer to ensure enough time to generate results. Vesting in crypto projects is typically very short compared to traditional investments. The entire ecosystem has a “do or die” kind of perspective when it comes down to cryptocurrency startups that have tokens. So as a result vesting is usually shorter than 1 year.
Depending on the project goals and investor sentiment, typically longer vesting provides a better opportunity for the team to deliver on their promised product/service and features, and as a result of their good work create substantial profits for themselves and investors alike.
Disclaimer: Investing in cryptocurrency projects is a risky business. It’s difficult to quantify how many crypto startups are successful, mainly because of the survivorship bias, where we (as humans) pay more attention to survivors rather than failures, who are often left forgotten.
Challenge for your next early-stage cryptocurrency investment.
Ask yourself how will this particular vesting schedule affect me in the future? Does it work in my favor?
In the end, vesting is a simple tool to help projects build up momentum before early-stage investors liquidate their tokens in exchange for stablecoins.
When all things are equal and the founders are dedicated to success, vesting typically works in the favor of both investors and founders. Investors get to sell at a higher price, thanks to the hard work of the founding team, and the founders have more time to produce results for the investors.
The future of vesting
Vesting is a mechanism, a tool that will stay with us for a long time. However, over time it will change. Back in early 2021, vestings for public rounds were either 100% or 50% at TGE, but never below. At the time of writing, 10–20% at TGE is normal for public rounds.
Heading into the future, we can see a few different types of vesting systems. Typically projects get access to all funds raised immediately, and we think vestings will transform into a milestone system that will reward good projects and founders for achieving results while weeding out bad projects and founders that are not able to produce results.
The concept of fair launches also is a relatively novel way to explore public sales, where the founding team dedicates a portion of the tokens to the sale, and anybody can invest as much as they want. The fair token price is decided by the level of activity from the start until the end of the sale. Platforms like Balancer and Cooper Launch are great examples of this type of public sales.
The concept of a fair launch is a very important topic in cryptocurrency investing, and for now, there is no ideal mechanism that ensures 100% fairness.
Everybody involved with investing is looking for the next best thing, so we are expecting novel vesting methods to be invented in the future!
About this Article
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We hope that you learned more about the relatively basic, yet fundamentally important concept of vesting from this article.
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