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Crypto Vesting and Cliffs

Author: Alan W. Date: December 12, 2022

One of the most popular ways for blockchain projects to raise additional funding is through tokens. The value of these tokens vary with factors like time, supply, and demand. If early investors flood the market by selling all their tokens, the value will plummet. To avoid this, new crypto projects establish crypto vesting programs.

What is vesting in crypto?

Vesting is the process in which purchased tokens are locked and released slowly over time. These tokens are usually set aside for teams, partners, advisers, and contributors. In other words, it’s the duration of time an investor needs to wait to fully claim their assets.

Vesting hinders early investors from selling all their assets at once, enabling teams to continue working on projects over a period of time. It also prevents them from abandoning the project and running away with the funds (rug pull scams). With vesting, token owners cannot sell their assets before a set date, offering some control of the token distribution and release mechanism during the pre-sale period.

Benefits of crypto vesting

1. Protects early investors against market fluctuations

When tokens are locked up for a predetermined period, investors cannot sell those assets immediately after they get listed on centralized or decentralized exchanges. This controls the risk of creating market spikes, helping to maintain a stable value for the token.

2. Creates a sense of loyalty

When team members know they’ll be rewarded for their diligence at a future date, they act as stakeholders and work harder to make the project a success. It also shows a sense of faith from the development team to their investors that the project is worth their time, money, and effort.

3. Prevents scams

Vesting discourages people from buying a company’s token for the sole purpose of dumping them as soon as the price hits an early high. Such activities can hurt the reputation of a project and also discourage other potential investors, making it hard for the project to survive.

Types of crypto vesting schedules

There are three primary types of vesting schedules

1. Linear vesting

In Linear vesting, the tokens are distributed equally over a certain period. For example, a project could release 25% of the locked tokens every four months for a total of 16 months.

2. Graded vesting

Graded vesting is when projects opt for a custom distribution frequency. For example, a project might release 10% of its token in the first 6 months, 25% in the second year, 40% in the third and 25% in the fourth.

3. Cliff vesting

A cliff is a period when no tokens are awarded. This, in turn, delays the start of the crypto vesting schedule. For example, if there is a 6-month cliff period, the token will be distributed only after the 6th month. Once the cliff period is over, the project might follow a linear graded schedule.

Crypto vesting – not just for investors

Crypto vesting targets investors and project teams including the core team, advisors, partners, and contributors. The token they receive as a reward are included in a vesting schedule. However, there is no standard crypto vesting period. Every project creates its vesting schedules based on its overall strategy and are influenced by a number of factors. It’s best to reach out to the project team to learn more about their vesting schedule.

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