What is Vesting and Why is Vesting Important for Crypto Projects?

Bittime - Crypto vesting is a token locking mechanism to prevent dumping. So, what is vesting? Learn their purpose, types, and advantages and disadvantages here.

MWhy don't some crypto projects directly distribute all their tokens to investors or development teams? Well, the answer lies in the concept of vesting. 

This process is often used to safeguard projects from potential dumping that could damage asset value. So, this article will thoroughly examine the concept of vesting in the crypto world in language that is easy to understand. Keep following, OK?

What is Vesting?

Vesting in the crypto world is a mechanism used to lock and release digital assets in stages based on certain conditions. Tokens subject to vesting cannot be sold or traded until the specified period ends. 

Typically, vesting applies to the development team, early investors, and project advisors. This is to prevent them from selling tokens en masse in a short time which could cause price instability in the market.

Read also: How to Buy BlockDAG (BDAG): Use ETH, BNB & USDT with Apple Pay, Google Pay or Credit Card

The Purpose of Vesting in Crypto

Vesting is not just a strategy to hold tokens, it also serves various important purposes in the crypto ecosystem. Here's the explanation:

1. Prevent Dumping – By limiting access to tokens for a certain period of time, vesting helps prevent large sell-offs that could drop the token's price in the market.

2. Maintaining Investor Confidence – Retail investors will have more confidence in projects that have a vesting scheme because this shows that the development team has a long-term commitment to the project.

3. Ensure Project Sustainability – Vesting ensures that developers and key contributors remain involved in the project at least until the vesting period is complete.

4. Reduced Volatility – With gradual token distribution, the supply of tokens to the market is more controlled, reducing extreme price fluctuations.

Types of Vesting

Vesting in crypto has several types of distribution mechanisms. The following are the types:

1. Cliff Vesting – In this scheme, no tokens are released until the cliff period (e.g. 6 months or 1 year) ends. After that, tokens began to be released gradually.

2. Linear Vesting – Tokens are released gradually in equal amounts over a certain period of time, for example every month or every quarter.

3. Graded Vesting – Similar to linear vesting, but the number of tokens released can increase or decrease over time.

4. Milestone-based Vesting – Tokens are only released when the project reaches certain targets, for example the development of a new feature or the launch of the mainnet.

Read also: What is a Contract Address in Crypto and Examples

The Vesting Process in Crypto

The vesting process in crypto projects is usually carried out through smart contracts on the blockchain. Following are the general steps in implementing it:

1. Determining the Vesting Schedule – The project team determines how long the tokens will be locked and what the distribution process will be.

2. Using Smart Contracts – Smart contracts are created to regulate token distribution automatically according to a predetermined schedule.

3. Running Cliff Period (if applicable) – If the project uses cliff vesting, then the tokens remain locked during this period.

4. Phased Token Distribution – After the cliff period is over, tokens will begin to be released according to the predetermined vesting scheme.

Advantages and Disadvantages of Crypto Vesting

Advantages:

- Maintaining Investor Confidence – Vesting ensures the development team remains committed to the project. 

- Prevent Excessive Price Fluctuations – With gradual token distribution, the risk of dumping is reduced. 

- Improve Project Stability – With vesting, the development team is more likely to remain involved in the long term.

Disadvantages:

- Limited Liquidity – Early investors may not be able to sell their tokens immediately.

- Risk of Loss of Token Rights – If an investor exits the project before vesting is complete, they could lose the tokens that are still locked. 

- Less Flexible – In some cases, vesting rules that are too strict can be a deterrent for teams or investors.

Read also: BlockDAG Team and Founders, and the BlockDAG Partnership

Conclusion

Vesting is an important mechanism in the crypto ecosystem that helps maintain price stability. In addition, this process can increase investor confidence and ensure project sustainability. 

With vesting, tokens are not immediately released into the market in large quantities, so the project can develop more healthily and sustainably. However, vesting also has its own challenges, especially regarding liquidity for initial investors. 

Therefore, before investing in a crypto project that applies vesting, make sure you understand the scheme and the risks.

FAQ

1. What is the difference between vesting and staking in crypto?

Vesting is locking tokens on a certain schedule, while staking is the process of locking assets to get returns (rewards).

2. Do all crypto projects implement vesting?

No. Some projects directly distribute tokens without vesting, but this increases the risk of dumping.

3. How long is the typical vesting period in crypto?

Vesting duration varies, but generally ranges from 6 months to 4 years depending on the project.

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Also, visit the Bittime Blog for interesting updates and educational information about the crypto world. Find reliable articles about Web3, blockchain technology, and digital asset investment tips designed to enrich your crypto knowledge.

Reference 

CFI, Vesting, accessed February 13, 2025.

Coinbase, What does vesting mean in crypto?, accessed February 13, 2025.

Author: Y