In recent years, there has been an emergence of DAOs and blockchain projects releasing tokens. As more and more projects launch, it’s apparent that successful projects exercise sound token vesting practices.
Token vesting is the process of distributing a project’s tokens to different groups according to a pre-determined schedule, called a vesting schedule. Tokens are usually vested to incentivize the ecosystem, and compensate core team members and investors that purchased pre-ICO tokens.
Token vesting plays a major role in the project’s relationship with investors and the overall market and can be life or death for developing projects. In this post, we’ll take a look at the current landscape of token vesting practices and the improvements that Streamflow’s on-chain solutions bring to vesting.
- What is ‘Vesting’? ‘Vesting’s’ Tradfi Origins
- What is Token Vesting
- Types of vesting schedules
- Importance of Token Vesting to project health
- How on-chain (automatic) token vesting improves off-chain (manual) token vesting
What is ‘Vesting’? ‘Vesting’s’ Tradfi Origins
Vesting in traditional finance describes an incentive program in which stock options or retirement plan benefits are given to employees after they’ve completed a goal or fulfilled a specified term of employment with a company.
Employees usually receive their benefits according to a linear vesting schedule. Linear vesting means employees are gradually given access to company-provided assets over time. As such, linear vesting schedules provide employees an incentive to perform well and remain with their company long-term.
Every company is unique, but most vesting schedules range from 3-5 years, where the employee is gradually issued funds over an allotted time. However, In cases like 401(k) and employer contributions, employees are usually 100% vested at the start, meaning company-provided funds are accessible to the employee at the start of employment.
What is Token Vesting
Token vesting involves locking and distributing a project’s tokens according to a vesting schedule. In other words, token vesting controls how and when the project’s token reaches its fully diluted market cap.
When deciding on a vesting schedule you must determine who receives tokens, how many they receive, and when they receive them. Projects usually vest tokens to compensate early investors and fund the project treasury, and other community efforts.
Great vesting schedules ensure stakeholders are adequately compensated while suppressing the inflationary effect releasing tokens has on supply.
Types of vesting schedules
Before we discuss the relationship vesting has with token health, we must consider the various types of vesting schedules. Though linear vesting is the most popular vesting schedule, there are a few other schedules that serve projects with different needs. Let’s review the different types of vesting schedules and some terms that support them:
- Linear Vesting – Linear vesting is the gradual distribution of tokens over a specified length of time. The vesting period could last anywhere from a few months to several years.
- Twisted vesting – Twisted vesting involves tokens being distributed randomly over intervals of time
- Milestone vesting – Milestone vesting is the distribution of funds based on the achievement of certain goals
- Vesting period – The period when tokens are vested
- Cliff – A ‘cliff’ is a fixed period where funds are locked, after which a percentage of funds are released in one lump-sum. ‘Cliffs’ are applied to linear vesting schedules to delay the start of the vesting schedule, which does two things: represses the tokens inflation and ensures the stakeholders’ long-term alignment with the project. (i.e 4-year vesting with a 1-year cliff of 15% signifies that the funds will be held for the initial year. After the 1-year period, 15% of the funds will become accessible, with the remaining supply being distributed over the subsequent 3 years.)
Importance of Token Vesting to project health
A founder’s decisions regarding token vesting are essential to a project’s future success because a project’s token supply essentially represents the organization’s equity and startup capital. For instance, a founder may issue tokens to signify equity for the Core team and VCs. But in the case of their treasury or incentive programs, founders are looking to swap their tokens and expend capital on growth initiatives and operational costs.
Tokens are usually vested in five main groups including:
- Core Team & Advisors
- VCs & Private Investors
- Treasury
- Public Sale
- Ecosystem Incentives
Each of these groups is subject to a percentage of the token supply and is released on separate schedules.
Core team & Advisors and VCs & Private investors
For certain groups like core teams & advisors, and VCs & private investors, the goal is to allow them to receive regular payouts but spread the release of the funds over a couple of years to promote long-term alignment with the project. If all of the project tokens are released at once there’s a chance recipients may sell them which would generate heavy selling pressure on exchanges and cause the token price to plummet.
Vesting to VCs & private investors is especially important because they want to know they are receiving a return on their investment and that funds are distributed transparently, securely, and on a schedule that gives them access to some upfront liquidity.
Treasury and ecosystem incentives
In the case of the treasury and ecosystem incentives, it’s customary to release tokens as necessary based on market conditions. Founders may begin with a “best-case scenario” vesting schedule but they should make adjustments depending on the rate of adoption of their project, the tokens circulating supply compared to its fully diluted market cap, and other points of analysis.
Ultimately, vesting is at the center of the supply side of tokenomics. Vesting ensures the viability of a token within the ecosystem and its overall longevity.
How on-chain (automatic) token vesting improves off-chain (manual) token vesting
The medium in which tokens are vested is just as crucial as the vesting schedule. If the project tokens aren’t locked and distributed securely and efficiently, founders may face issues in the form of:
- Excessive fees
- Lapses in transparency to the community
- Hacks draining the project’s funds
The shift from the off-chain (manual) method of token vesting to the seamless on-chain (automatic) solves most of these problems. Off-chain vesting refers to storing and vesting tokens on a centralized exchange (CEX) or a blockchain than the project’s native blockchain.
There are obvious reasons why off-chain vesting lacks in comparison to on-chain methods. The most apparent flaws of off-chain vesting are the lack of transparency to the community and the lack of security. Off-chain methods usually involve a founder taking custody of tokens to a CEX wallet and sending them to the specified wallet addresses on the day of a release. This approach lacks transparency as the projects’ community won’t be able to follow the token releases via the blockchain explorer.
When founders vest tokens on a separate blockchain, they have access to its blockchain explorer records. Regardless, the constituents of the project may prefer the familiarity and ease of use that the project’s native blockchain provides.
The off-chain approach is also time-consuming and costly. Founders must remember to send tokens to specified wallets whenever a release happens, which incurs multiple transaction costs. It’s also a security risk for one person to have control over the total token supply as they are more susceptible to hacks.
Streamflows on-chain vesting solution aims to address the off-chain method’s weak points through the following features:
Security – Streamflow is fully audited. When tokens are locked, they are guarded by our smart contracts
Transparency – Token streaming details are accessible to both parties, and all transactions are verifiable on the Solana blockchain explorer
Cost-efficiency – Token streaming only requires one transaction, diminishing the need for recurring payments. There’s no need for gas or any further transactions by the sender or receiver. Streamflow charges a .25% transaction fee on streams.
Automation – Once you set a schedule and initiate a stream, no further transactions are required
Speed – Solana has a slot time of 400 milliseconds and is currently processing 2,123 TPS (Transactions per second) at the time of writing this
For an additional layer of security, teams using Streamflow can access our Multi-signature wallet app to create a treasury and send teams funds securely.
Conclusion
As more Web3 projects appear and more retail investors enter the market, token vesting will continue to play an increasingly growing role in a project’s rate of success. With Streamflow, DAOs and web 3 projects can rest assured that their funds are secure and distributed efficiently when the schedule requires it. Token vesting has come a long way, and Streamflow intends to make sure token vesting techniques and tooling are efficiently developed in the years to come.
To learn more, visit Streamflow.finance/vesting