A graduate of the University of Virginia and now based in the UK, Jimmy has been following the development of blockchain for several years, optimistic…
Eddie Wrenn is a reporter and news editor who has worked in national and international newsrooms in both the UK and Australia, with a particular…
Token lockup (or vesting period) is a specific time frame when cryptocurrency tokens cannot be traded or transferred.
During this lockup period, holders of such tokens are restricted from selling tokens received either from airdrops, presales, or after an initial coin offering (ICO) in the open market.
Token lockups are often enforced using escrows or smart contracts, which are pieces of code capable of executing commands autonomously.
These lockups serve as a preventive strategy intended to stop token sales shortly after their launch into the market. This step is taken because most investors tend to offload their tokens as soon as they acquire them.
In the event of such a mass sell-off, the token price can experience a steep decline due to increased sales with minimal demand. Hence, token lockup prevents this from happening and instills a level of confidence in the minds of token holders.
Furthermore, it incentivizes both the project founders and participants to focus on building the project for the long term.
With a token lockup, a blockchain protocol can craft an appropriate support base for the token before it goes live in the market. This way, they can reduce the potential volatility of the digital asset in the long run.
Meanwhile, locked-up tokens are often not considered part of an asset’s circulating supply, thereby often disregarded in technical analyses conducted by asset traders.
Given the rising prevalence of rug pulls and scams, investors usually require crypto projects to initiate vesting periods for their digital coins. This offers a level of confidence that project founders won’t make off with the funds.
Below, we consider some of the popular strategies employed by blockchain protocols for token vesting:
When choosing the most suitable vesting period, there’s no one-size-fits-all solution in this context. Project founders will need to consider their unique offering alongside the goals and objectives of their protocol. This will guide their decision in selecting the token lockup structure that ensures long-term investment security and mitigates the risk of significant price drops in the market.
Crafting a token lockup mechanism is quite a complex process that requires a strong background in blockchain development. However, what is universal across all structures is the role played by smart contracts.
A smart contract contains different proposals and agreements only executed once the premises align. Once this is in place, it deploys the terms of the agreements autonomously.
To execute a token lockup, the smart contract is often crafted to ensure that transferability and trading are non-existent until a preset period or certain conditions (milestones or performances) are met.
This is possible due to a locking mechanism that is hard coded into the smart contract. Hard coding is a process wherein written codes cannot be modified or rewritten once deployed.
Once this locking mechanism goes live, making adjustments to its components becomes a formidable challenge.
For instance, during some of the best crypto ICOs or crypto presales, when an investor claims tokens, they are often sent to their designated wallet addresses. However, if a token lockup mechanism is in effect, it prevents these tokens from leaving that wallet until the specified lockup conditions or duration is met.
Besides serving as a deterrent for massive sell-offs of an asset, token lockups provide other advantages:
In the absence of a lockup mechanism before a project’s launch, investors may encounter a few associated risks:
Blockchain, or distributed ledger technology (DLT), is the bedrock on which this token restriction is built. This is because it is secure and immutable. Immutability is an expression, meaning that data stored on blockchain protocols cannot be altered after it has been added to a block. This makes them a viable option for ensuring token lockups are implemented.
Moreover, blockchain technology is transparent, as anyone can view the transactions executed on it. With this system, projects can easily vet all transactions and store their tokens with zero worries in escrow. Once the conditions pre-coded are met, the underlying smart contract begins to execute them autonomously.
Token lockup is experiencing widespread adoption in the cryptocurrency space. It’s now a standard practice among the majority of new blockchain protocols.
At the crux, it mitigates against the risk of price volatility while positioning the project for stronger long-term success. This often has the consequence of fostering trust between investors and the development team.
However, project teams must select the most fitting token lockup structure tailored to their goals and objectives.
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A graduate of the University of Virginia and now based in the UK, Jimmy has been following the development of blockchain for several years, optimistic about its potential to democratize the financial system. Jimmy's previously published work can be found on BeInCrypto, Bitcoin Magazine, Decrypt, EconomyWatch, Forkast.news, Investing.com, Learnbonds.com, MoneyCheck.com, Buyshares.co.uk and a range of other leading media publications. Jimmy has been investing in Bitcoin himself since 2018 and more recently in non-fungible tokens (NFTs) since their boom in 2021, with expertise in trading, crypto mining and personal finance. Alongside writing for Techopedia, Jimmy is also a trained economist, accountant and blockchain…
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