Understand Crypto Vesting and how it works

Of CNBCTV18.com August 15, 2022, 11:59 am IST (published)

In venture capitalism and startup culture, vesting refers to the delayed transfer of company stock to employees and early investors. How does it help businesses? It ensures that the team members are in for the long term, and the first backers who believed in the project are fairly compensated.

Vesting in the cryptoverse is also about rewarding early believers in a project. Since the concept of centralized ownership is not great in the world of blockchains, crypto earning happens in the form of tokens instead of shares.

What is crypto earning?

Monetization refers to the locking/allocation of a certain percentage of the maximum circulation of the token before the Initial Coin Offering (ICO) or the Initial DEX Offering (IDO) (usually around 20 to 25 percent) for the primary parties involved in the project. These tokens are then transferred to them after a certain period of time known as the vesting period.

How does crypto earning work?

Crypto-vesting uses smart contracts to transfer the ownership of tokens when the external criteria are met, whether it is the duration of the work on the project or the completion of certain stages of the project.

Crypto vesting can also be customized to the founding team’s liking. For example, there is no specific duration for the vesting period. It could be 6 months or 60 months, depending on the thought process of the founders. When the concept started, it was usually around 2 years, which has now popularly expanded to 3 years and more.

Vesting schedules and clips

In addition, there may be fixing plates and an accrual curve – which ensures that the transfer of tokens does not happen all at once, but through gradual accrual plans. The period from the start of the earning period to the transfer of the first set of tokens is known as the cliff. This helps to keep the encouragement going throughout the development of the project.

Solana, for example, sold 15.9 percent of its initial supply to seed-round investors at a rate of $0.04 per SOL. On the other hand, public sale participants received 1.6 percent of the offer at $0.22 per SOL. Although seed participants got their SOL cheaper, they were also subject to a 9-month cut-off period.

The benefits of crypto earning

Vesting is widely used in blockchain-based projects for the following reasons:

1. Reward of the faithful

The first ones into the project, whether they are the founders, early employees or investors, are the ones who take the most risk (considering that the success rate in the crypto space is minimal) and should be fairly compensated for their faith in the project. This is why projects tend to set aside close to 20 percent of tokens for the team to reap the rewards of their hard work when the project succeeds.

2. Retention of employees

When employees know that they will be rewarded in the form of tokens at the end of the vesting period, two things are guaranteed – one, they will stay with the project until the vesting period is over, and two, they will work harder to increase the value of the project (and thus the token) so that their earned tokens amount to something big.

3. Ensure no price fluctuations

When an ICO occurs, the first instinct of anyone who has a large number of tokens is to sell. This floods the market with tokens, bringing down the price of the token as well as the project itself. Vesting ensures that the opportunity to sell for these “whales” comes after a certain duration.

4. A way to stay away from carpet covers

In today’s world of pumps and dumps, we’ve seen too many founders sell their tokens en masse and exit projects after ICOs, leaving investors high and dry. It is a blatant abuse of public trust. Once the founder’s eventual rewards are earned and unavailable for sale, they have no choice but to work hard and ensure that the project remains successful.

Conclusion

Vesting is one of the many useful things that the cryptosphere has adopted from traditional finance. It gives confidence in a project and ensures the loyalty of employees. It also rewards early believers in the project for the initial and important support they provide. Most importantly, it guarantees the longevity of the project, from vision to success.