What is vesting
The crypto industry as a big phenomenon emerged only in the late 2010s, and many practices were known long before. Vesting is no exception. Usually it refers to the transfer of company shares into ownership after a certain amount of time worked.. If no transfer occurs, rights to the securities are not transferred.
Why is this necessary? Everything is quite simple. A business often begins by seeking funding. Finding investors is not just about selling them an idea, but also about providing a guarantee that the idea will be implemented. Vesting is a guarantee for the investor that after the launch of the project you will not run away from the project by quickly selling your shares. Thus, initially the founder does not have any shares or shares of the business, being simply an employee. And only after a certain time has passed, the founder receives his shares.
Vesting can be found in the pension market. This implies the transfer of corporate savings generated by the employer to the benefit of employees.
In other words, vesting is the rules for the gradual transfer of ownership of something.
What is crypto-vesting
Crypto vesting is the process of blocking tokens for a certain predetermined period of time, after which their immediate owners will gain full access.
Most often found during ICOs, token sales and similar activities for the purpose of seeking funding. The process is designed to motivate investors and project participants to work long-term, preventing early exit from business after the first profit on the lightning sale of cryptocurrency. People and organizations gain access to coins after a certain period of time, and the interval when the tokens will be unlocked is determined in advance and is called the vesting period.
The schedule agreed by the parties according to which the cryptocurrency is transferred to the owner may be different. However, almost every project has a waiting period or, in other words, a cliff (translated from English as a cliff). After this, unlocking occurs, and more often on a regular basis. For example, tokens can be locked for two years, and then begin to arrive to their holders once a quarter.
Vesting may concern different business participants:
- teams and developers: when investors try to make sure that the developers of the project will stay for a long time to develop it;
- investors: the goal is to prevent sharp speculation with a new cryptocurrency, which could cause a collapse in the rate;
- founders: to link their interests with the long-term activities of the project.
To ensure that the implementation of crypto investing is automatic and visual, smart contracts are usually used. This allows you to build trust between the crypto community and investors, as the process shows the interest and involvement of key figures (founders) in the long-term success of the project.
Unlocking tokens can occur according to various schemes. Can be either one-time or gradual. The last option is the most common. One thing is common everywhere – there is a certain blocking time.
Types of crypto investing
There are four main types of crypto investing:
- Linear. Tokens are unlocked at predetermined intervals. The system was used to distribute ether among the first holders.
- Milestone based. The distribution of tokens will occur when certain goals or indicators are achieved. They can be completed not only by team members, but also by project partners. Who should achieve what is determined individually. Examples of milestone-based vesting include the distribution of tokens upon the successful implementation of some update, the introduction of new functionality, or the achievement of other important development points.
- Hybrid. This variety includes features of both linear and milestone-based vesting.. The circuit is quite common in real projects.. An example would be when tokens for investors are distributed using a linear method, while for developers they use vesting based on milestones.
- Reversible. Here, unlike classical vesting, the reverse process occurs: tokens that are initially owned by the holders can be confiscated from them if certain requirements are not met. Reverse vesting was used by Filecoin during the implementation of SAFT (Simple Agreement for Future Tokens).
The variety of models is one of the distinctive features of cryptocurrency vesting. However, the difference doesn't stop there.
Cryptovesting vs vesting
The main difference between vesting and crypto-vesting is the former’s reliance on centralized administration. While the second is implemented through a decentralized blockchain.
There is also a difference in how both processes are implemented. Crypto investing is possible through the use of smart contracts. Traditional investing uses stock options and restricted securities as instruments.
Traditional vesting is much less diverse in its forms. There is very little use of the milestone-based model here.. Most of it is based on a simple linear type.
Cryptovesting
Vesting
Implementation mechanism
smart contracts on the blockchain
centralized administration
Openness
transparent, without trusting others
centralized supervision
Token type
tokens and coins
stock options, restricted shares
Flexibility
various models and structures
standardized models
Ownership structure
decentralized, token holders
centralized, company or principals
Impact of vesting on token supply
Cryptovesting in the vast majority of cases is intended to limit the supply of tokens. The period during which the cryptocurrency is blocked is necessary to prevent a wave of sales. While the term lasts, new tokens are not considered to be in circulation.
Vesting directly affects not only the supply of a cryptocurrency, but also its market capitalization and liquidity. It's completely natural. Market capitalization is the projection of the number of tokens to their price. The greater the supply, the greater the liquidity.
Tokens are considered to be in free circulation only after unlocking, which can be partial or complete. This can have a direct impact on changes in the mood of investors and traders, on the ratio of supply and demand, and other metrics within a particular ecosystem.
Benefits of crypto investing
The first advantage of crypto vesting is flexibility. This is not something fixed once and for all.. Each project can develop its own system for blocking and unlocking tokens, which will best suit the goals and objectives of a particular platform.
The second advantage is transparency and automation. Token holders can immediately understand what and how will be implemented by the platform. You just need to familiarize yourself with the established regulations.
The third plus is safety. Blockchain technologies make it possible to avoid centralized manipulation and unauthorized intervention.
Disadvantages of crypto investing
Despite the fact that crypto investing is a good motivator for investors to stay with a project longer, it carries certain risks. The first is shortcomings in the legal field. The legislation of most world powers in the field of cryptocurrencies is still crude. There is often no clear definition of blockchain, let alone something like smart contracts.
Secondly, there is a possibility that there will be errors in the code of the smart contracts themselves. This may cause various force majeure situations that will affect, among other things, safety.
Crypto-vesting can also lead to massive sales of specific tokens on crypto exchanges due to a sharp increase in supply. And as a result, investors want to quickly get rid of coins.
In addition, market participants may experience organizational problems. Cryptovesting is not something standardized. The procedure may vary from project to project. For example, different order of unlocking tokens. This can lead to confusion as investors' expectations will not be met.
Conclusion
Cryptovesting is a process in which tokens are not immediately transferred to their owners, but gradually, having previously passed a blocking period. This is done to achieve several goals at once: to retain specialists in the project team, to avoid a sharp collapse in the exchange rate by increasing supply, for the long-term success of a particular cryptocurrency.