If you are a cryptopreneur, vesting is the term you must be aware of. The term “vesting” is originated from the Latin word “vestire”. It is being widely used by companies and entrepreneurs nowadays. It usually introduces when a company issues stocks, coins or tokens at a time.
Importance of Vesting
In traditional finance, some companies also offer equity to their employees. But if they release it together, it is common to generate selling pressure on exchanges, dragging stock price to the ground. And therefore, companies usually introduce a vesting period to delay the promised assets’ ownership.
In the blockchain space, visionary teams and founders mint tokens and sell them to VCs, private capitals, and the public through Initial DEX Offerings (IDO) to support the disrupting ideas they are building. As these sales conduct in a decentralized manner, anyone who sees the potential can participate in token sales.
After the conclusion of the token sale, participants will receive tokens based on a predetermined exchange rate. If they are given all of the tokens they purchased, it is very likely to experience a huge sell-off once the token is listed on centralized or even decentralized exchanges. This is widely popular as rug pulls
. That’s where vesting comes to the rescue.
Introduction to Vesting
Vesting is the process of locking and distributing purchased tokens within a given timeframe. A particular timeframe that determines vesting is known as “Vesting Period”.
It basically delays the access to the assets being offered.
It is not only used for project founders, advisors and team members but also private investors who have purchased tokens before they got sold to the public. However, current projects do have vesting plans for tokens that are sold in the public rounds to maintain selling pressure.
Type of Vesting:
Cliff is the most discussed term with vesting. A durational lock placed on tokens ahead of the vesting schedule is called Cliff. It is primarily used for seed and private sale investors. As the term is now clear, here goes the type of vesting:
• Linear Vesting: The distribution of tokens in equal parts within a certain period of time is known as linear vesting. The time period can be days, weeks, months or even years.
• Twisted Vesting: The distribution of tokens in random parts within a variety of time periods is known as twisted vesting. The time period varies from days, weeks, months or even years.
For example, 600,000 TEST tokens need to be vested for Advisors. Under linear vesting, 50,000 TEST tokens can be released monthly, completing the entire vesting within a year. If a 6 months cliff is added, an advisor will receive 50,000 TEST tokens every month for consecutive 12 months – starting from the 6th month.
But in twisted vesting, you don’t see a linear pattern in distribution here. 25% of 600,000 TEST tokens can be released monthly for the first 3 months and then 75% of TEST tokens can be released followed by a 6 months cliff. The twisted pattern is usually seen in tier1 projects or layer 1 blockchains to maintain token pricing.
Thus, the vesting schedule consists of a number of individual locks based on the nature of the release. During the lock period, none can access tokens before the release schedule. For investors’ vesting, projects usually keep tokens under their custody and airdrop them to investors’ addresses on the release date. And the tokens under custody will not be counted as circulating supply.
Vesting for VCs and Capitals
These are the entities, organizations of individuals who purchase a large number of tokens in the early stage by signing the Simple Agreement for Future Tokens (SAFT). As they support projects at an early stage, they will be getting tokens for a discounted price as compared to public sale.
As volumes sold during early-stage rounds are relatively high, projects can experience enormous selling pressure once the IDO is over and the token is listed on CEX/DEX. It adds a huge number of tokens to circulation, leading it to a great fall in token price.
As blockchain is relatively a new technology, it requires sufficient time to build and deliver something. Projects who are raising funds via IDOs usually work hard to attract audiences to fulfill use cases, ultimately giving inherent token value. And hence, it requires patience and vesting does it well.
It permanently eliminates the fear of losing token control to a few VCs or capitals on exchange listing. If that happens, a group of people with more holdings can fluctuate the token price the way they want and lead a project ecosystem towards destruction. Therefore, vesting has become a core part of token economics on which any kind of investors’ investment decision depends.
Security on Vesting
As we have learned that vesting involves locking a huge number of tokens worth hundreds of thousands, if not millions; the security of locked tokens does matter. The blockchain ecosystem is still young and lacks investor security. Well, there exist two ways to lock and vest tokens for various allocations.
#Scenario 1: Founders keep custody of those tokens themselves and maintain a book where the token release schedule is structured. On the day of vesting release, they basically airdrop the corresponding tokens to investors and advisors via bulk token senders. i.e. multisender, disperse, etc.
This approach is time-consuming and lacks trust as there is no third-party custody involved. As a result, the team has control over a large number of tokens and they can sell them off or cancel the token release at any point of time. Many of the projects have suffered from the same issue.
#Scenario 2: Founders establish a token vesting schedule with the help of third-party platforms. Their smart contracts are well-audited from reputed auditing firms and built specifically for handling customizable vesting for projects. Projects can also showcase their entire vesting transparently and build trust.
In some cases, teams also deploy smart contracts for handling their token vesting in-house. If they are auditing such contracts by known firms, it does not gather issues but resources spent on building and deploying such smart contracts for projects related to NFT is not a feasible idea as it will not be useful then after.
So, what’s the other way that does not involve complexity? Here you go …
How to create a token vesting schedule effortlessly?
There exist many third-party platforms that help create a vesting schedule for tokens deployed on multiple blockchains. Some of them deploy a token release schedule internally while a few of them provide a user interface.
In this guide, we will be utilizing BlockPad Vault’s intuitive interface for establishing a vesting schedule. It supports four leading blockchains including Ethereum, BSC, Polygon, and KCC while young minds behind the BlockPad are committing to integrate more blockchains in near future.
Assuming that you have a token smart contract deployed on supported blockchains, the steps required to create a vesting schedule are as follows: (I am demonstrating the creation of a vesting schedule for Polkalokr (LKR) tokens that I had purchased in the IDO.)
Select the blockchain (mainnet) your token is deployed on. Supported chains are Ethereum, BSC, Polygon and KCC.
Enter your token smart contract address in the field shown here. It will fetch token details from the blockchain.
Confirm the fetched token details. The total supply of your token and the number of tokens held in your address will be visible here.
Utilizing the “Myself” option, you can create a vesting schedule whose released tokens will be withdrawn to your address. “Someone Else” option will allow you to create a vesting schedule for the address other than yourself.
“Single Lock” can create a simple token lock for a fixed duration. On the other hand, “Linear Vesting” will allow you to create a cliff inserted linear release schedule. For example, the snapshot shown below will release 500 LKR tokens for 5 consecutive months followed by a 2 months cliff.
You can cross-check all of the locks along with the exact unlock time by simply clicking on “Vesting Table” option. See the snapshot below in my case.
Once you approve the token spend and final Metamask transaction for locking tokens, your vesting schedule will be visible on the Vesting page. This is the interface where you will be able to check the next release and search vesting created for various purposes. i.e, investors, team, advisors, marketing, etc.
The process of creating a vesting schedule through BlockPad does not require technical knowledge and it comes handy after the IDO. It is not created for just teams but any individual can initiate the vesting. Thus, vesting on tokens is employed to prevent major market dumping and token price manipulation. On the other hand, it also represents that the team is being transparent in their token release, building trust ultimately.