Crypto Vesting - How To Do It & Why Is It Important

Crypto vesting is a blockchain term that refers to the lock-up and gradual release of a company's tokens over a specific period. Following the ICO (Initial Coin Offering), this hold and release pattern is subject to a predefined schedule called "a vesting schedule". During a "cliff" period of a vesting schedule, the owners cannot sell, trade or invest their tokens. After the cliff has elapsed, the tokens become accessible. The release could be either gradual or linear. Vesting is a helpful strategy for stabilizing cryptocurrency prices, building trust among participants and preventing market dumps. 

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CRYPTO VESTING - HOW TO DO IT & WHY IS IT IMPORTANT?

Crypto vesting is a mechanism through which tokens are locked for early investors and team members for a certain amount of time. The total amount of tokens allocated for the blockchain project members, early investors or employees is often circulated later. Instead, they are subject to a set release scheme called a "vesting schedule". This token lock-up is mainly to prevent early buyers of new tokens from bulk-selling their tokens right after the Initial Coin Offering (ICO) period and make a quick profit while lowering the coin's value. The coin value depreciation occurs when plenty of supply (token) is circulating that is not proportioned by the demand for that token (potential buyers). 

When investors purchase a token from a start-up crypto company, they buy the promise that the coin will perform well in the market. The creators only keep that promise when they put the right amount of resources and effort into promoting their coin, developing their services and implementing an effective marketing strategy. Suppose early investors and project members can cash out their allotted tokens when all the hype surrounds this new token. In that case, they will not be willing to contribute energy to developing the company. Besides, there will be an abrupt drop in the price of this token due to oversupply. Right there, a vesting schedule acts as a road bump, slows the journey, and ensures a safer ride. Vesting is also a helpful strategy in retaining employees by the prospect of future rewards. This way, companies can ensure dedication and consistency from their employees, at least during the vesting period. 

Blockchain projects often use smart contracts for the pre-set release of vested tokens. Smart contracts are automated codes that carry out agreements according to encoded conditions, requirements, demands and timeframes. Once the set conditions are fulfilled at a set period on a vesting scheme, the smart contract will release a certain amount of tokens ready to go into circulation. Within the Web3 environment, automated business agreements such as smart contracts ensure transparency and smooth transactions. Although these contracts must undergo a strict audit before they can be used, certain companies provide smart contract services. For instance, Add3 offers pre-audited and compliant smart contracts that save our clients thousands of dollars that would typically go towards auditing costs. Using services like pre-audited smart contracts is a smart way to begin their crypto journey for any blockchain start-up. 

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What is a Vesting Schedule? 

The vesting period or token lock-up determines the token release schedule after the initial token introduction. This period can last from 6 months to several years. The vesting schedule prescribes the release dates and related token amount to be made accessible. For instance, a specific vesting schedule may state that one year after the Initial Coin Offering (ICO), 10% of the tokens will become accessible to the holder. At the end of this vesting period, the liberated tokens can be sold, exchanged, traded or held by the owner. Afterwards, another vesting period with a similar or different schedule begins. The earlier buyers of a specific cryptocurrency often have the privilege of paying a lower price per token but are liable to a more strict vesting schedule. It is a strategic move implemented to prevent early buyers & creators of the token from executing a quick pump-and-dump scheme. There are three vesting schedules depending on the time structure, the released amount and particular conditions: Cliff, Graded and Linear Vesting Schedules. 

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Cliff Vesting Schedule: 

The starting point of a pause period between the beginning of a vesting period and the release of the first bundle of tokens is called a "cliff". During the cliff phase, no tokens are given out. If an investor decides to take out their money before the end of the cliff period, they will have to forfeit their ownership of all locked-up tokens. The cliff acts as a preventive mechanism against the crush on the token's price due to oversupply in the market. 

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Graded Vesting Schedule: 

This schedule sets tokens to be granted in stages, each higher or lower than the previous. A definite time gap between these stages is incorporated into a staggered vesting plan. For example, 25% of the vested tokens become accessible after the first six-month phase and 45% are liberated after one year. This way, the vested tokens are gradually introduced to the market, promoting market stability and trust towards the business. Suppose the investors decide to withdraw at one point before the vesting schedule is fulfilled. In that case, the tokens they receive are equivalent to the percentage already released over the waiting period. They relinquish any rights to the rest of the vested tokens. 

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Linear Vesting Schedule: 

Linear schedules release vested tokens in equal instalments over a predetermined period. For instance, 25% of holdings unlock after the initial three-month period, and the same occurs again after another three months. In another case, a vested investor may receive 10% of their holdings once 10% of the predefined time has passed. 

The orderly time limitations in vesting schedules are beneficial in two ways. First, people who are launching and giving these tokens to themselves cannot sell them for at least some time, so the investors are assured that the company will make significant progress towards the project goals they promised in the first place. Second, the pump-and-dump schemes and blockchain scams are majorly prevented since the vested tokens are not fully realizable income once they are subject to a vesting schedule. Because even though it is profitable to create a cryptocurrency out of thin air, create a buzz around it and sell your holdings right after people have bought into the hype, it is costly to fulfil promises around that cryptocurrency. Naturally, potential buyers tend to invest in cryptocurrencies placed within a vesting schedule since there is a higher chance they will yield significant returns in the long run while posing fewer risks. 

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Parties Involved in a Crypto Vesting Schedule:

A company is usually the initial mover; the actor decides, plans and offers a vesting schedule to the potential buyers. Moreover, the company team is responsible for devising a strategic roadmap and implementing it correctly to provide the benefits they pledged in the first place. 

An investor is an individual or a collective entity that invests in a token and associated project. They are also likely to offer assistance and guidance, even oversee the project. 

A vestee refers to those who participate in the vesting schedule. Conditions of a vesting schedule may vary depending on the tasks or milestones each vestee must accomplish. However, once predetermined processes are fulfilled, the vestees receive the rewards on their vested tokens.

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Advantages of Crypto Vesting: 

Risk Mitigation: Vesting acts as a precautionary measure for each involved participant. For the company, especially start-ups, locking up tokens for a certain period prevents early investors and employees from quickly selling off their entire holdings and leaving the company before making any contributions. For investors, putting their money into a brand-new cryptocurrency poses many risks, such as scamming. A company offering a predefined vesting schedule for each participant is one way to assure potential buyers that they are purchasing from a reliable team that would dedicate the promised effort towards operating their coin since they are also subject to those waiting periods before their assets become accessible. 

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Market Stability: Based on a simple supply-demand curve, if a market is oversaturated with the supply of a particular token at a given time, the price drastically decreases since there is insufficient demand to absorb. An abrupt overflow of a single currency would also mess with market volatility. Pump-and-dump schemes, where individuals cash out big chunks of a cryptocurrency right after the ICO, cause such mayhem in the market as much as letting down the investors. Gradual release of vested tokens is a pretty efficient way to combat that. 

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Rewarding Loyalty: Crypto companies often allocate a fraction of their tokens to team members and employees. Owners make this strategic decision to foster loyalty among team members. Team members with a prospect of making a profit on their vested tokens as high as the token price goes give them extra motivation to put in their best work towards making progress. Thanks to the nature of vesting schedules, team members make a long-term commitment to improving the token value. 

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Long-Term Commitment and Strategic Decision-Making: Just as the team members of a crypto company are motivated to work for the duration of the vesting period to gain higher benefits, participants are encouraged to dedicate their assets over an extended period. Participants making long-term planning around their investments complement the sustainability & goals of a crypto company. This way, an atmosphere of trust is built among all parties while risks and instability associated with the crypto sector are minimized. 

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Crypto vesting is a crucial mechanism in the world of cryptocurrency that plays a pivotal role in maintaining market stability, ensuring long-term commitment, and mitigating risks for investors and crypto companies. At Add3, our commitment to providing cryptocurrency services includes helping our clients implement effective vesting schedules through pre-audited and compliant smart contracts, token minting, token vesting and effective distribution, crypto staking and liquidity pool staking. By doing so, we contribute to blockchain projects' overall success and sustainability, fostering trust and loyalty among investors and team members. As the crypto industry continues to evolve, embracing the advantages of crypto vesting is an intelligent strategy for any blockchain start-up, paving the way for a safer and more prosperous crypto journey.

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