Why project team token vesting is important for investor confidence in crypto projects.
Introduction to vesting
The concept of vesting is not new or unique to crypto. It is used in every venture-backed company to protect early-stage investors by aligning their interests with founder incentives.
In the mainstream/FIAT world, vesting typically applies to a founder's shareholding and is governed by a vesting schedule that dictates how a founder is awarded or earns their stock over time. This typically is comprised of an initial period where no interest or shareholding is unlocked followed by a cliff date, where (often) 25% of their entitlement is released, and linear daily, weekly, or monthly vesting of the remaining 75% of their entitlement thereafter, depending on the situation.
Token vesting in crypto
When it comes to crypto projects, the early investors in the project are the token holders that purchase a token during the early stages of the project, including those that purchase through a presale event (IEO or similar) as well as those that buy early-stage project tokens on the secondary markets like CEX and DEX. It is these groups of investors that deserve, and who should actively seek out, projects that have implemented a vesting schedule for founders/teams to align their interests.
What is unique to cryptocurrency projects however is the way that vesting schedules are governed and implemented. Implementing a vesting schedule for founder stakes in crypto projects is typically done using a smart contract that locks away the teams’ allocation of tokens and releases them based on a predefined and schedule. There are multiple trusted and publicly available tools that offer this service for projects to use, so there is no excuse for a project team who is unwilling to implement one of these solutions.
One of the more popular platforms that offer token locking services for project teams to use is the Trust Swap platform which was incidentally used by the team at CoinDogg to lock and vest the project teams' allocation of tokens.
Because platforms like Trust Swaps operate using public ledger blockchain technology, all transactions of locked tokens are publicly available and verifiable by anyone. You can verify CoinDogg’s token locking schedule on Trust Swap by clicking the link below.
Benefits for investors
As mentioned above, the main benefit of implementing a vesting schedule for a project team's allocation of tokens is the long-term alignment of interests and security it provides early-stage investors. Some of the specific benefits have been identified below:
Prevents token dumping
Project teams are typically allocated anywhere between 10–40% of the supply of tokens which creates the potential for them to have a significant impact on the token price if they were to sell large quantities of tokens in a short period of time. Selling a large number of tokens in a short time frame would usually cause a price to plummet, token vesting schedules prevent this by locking up the project team's tokens.
Guarantees reduced circulating supply
Locking project team tokens in a vesting schedule provide greater certainty for investors of what the future circulating supply of tokens will be. This can be important for anticipating future token price movements and is beneficial for many investors.
Assures commitment of team long term
Token vesting schedules, give investors assurance that the project team will have a long-term commitment to working on the project and executing the vision set out in the project's whitepaper. Project team members only achieve their full allocation of tokens at the end of the vesting schedule so have an interest to stay committed for its duration.
Reduces the chance of a rug pull
Among other indicators like having a credible non-anonymous team, a project that is willing to lock founder tokens into a vesting schedule is a good indicator that they are less likely to perform a rug pull. After all most of the value, a project team hopes to gain from the project comes in the form of the price appreciating on their native token. Often a project team will launch their token at a fraction of a dollar and by delivering on their vision and growth in their community hope to see this appreciate many hundreds if not thousands of times.