DeFi
September 28, 2022
What is Token Burn and it's effects on price
An A-Z guide on token burning and how it is largely impacting the cryptocurrency industry.
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Ever since the crypto world came into the limelight, a lot of people have started using it to earn some extra cash on the side. A huge amount of people have even made it their main income source and all that has been possible because of how many opportunities cryptocurrency brings.
A lot of cryptocurrency projects use methods like vesting to add more value to their projects. This article will help you understand what Vesting is, what reverse and normal vesting are, what is the importance of Vesting and it will also explain the Vesting period. So let’s get started.
Vesting is a token distribution method used by project teams to strategically release tokens in batches over a long period of time. Vesting allows project teams to gain control over their tokens and provides protection against any possible manipulation in the market.
Vesting is basically a term used for conditioned distribution of tokens in which the manner in which tokens will be distributed is under control of the project team. It usually consists of a vesting period or lock-in period which locks a certain amount of tokens for a specific time.
We will discuss the vesting period later in this article, first let’s take a look at different types of vesting techniques.
In token vesting, it is divided into two-parts. There are two token vesting options
Normal vesting is a type where a project founder has the power to hold/lock up their tokens. Usually, the tokens are locked for a decided time. The tokens are locked up in a smart contract.
In normal vesting, project founders have the authority to hold a percentage of tokens. Along with holding tokens, they can release them periodically. Team can release tokens for example 20% after six months, and 50% after 1 year and so.
There’s a term “cliff” investing, usually, you would be familiar with this term from the fiat vesting system. In the Cliff period, the investor has to wait for a predetermined period, after which the first incremental batch of tokens is released.
Later we will see reverse liquidity where investors have no options to sell their tokens, wherein Normal vesting investors can sell their tokens after they are released periodically.
Investors can ruin or disturb the project by selling their tokens after the vesting period and getting out of the project. This can cause heavy fluctuation in the market and massive price drops. This is one of the reasons why normal vesting is not effective. Normal vesting is susceptible to pump and dump.
Reverse Vesting is one which is not susceptible to market pump and dump. This ensures the investor sticks with the project, usually, the period of the project is decided for 2 years. As there is zero probability of pump and dump, the investors stay committed to the project. Additionally, there is no effect of the economy on the token price and they can sell it without affecting the token price.
But the drawback is Reverse vesting holds or limits the liquidity of the tokens. This means if the token is released in the given vesting period, let's say for 2 years (projects can shorten the vesting period) but the investors can only sell the tokens after up to 4 years with some exceptions.
As you can say it took around 2 years to unlock your tokens but while you are out to sell these tokens it can take up to 4 years. –
By now, you must be familiar with the process of vesting. To someone who is just entering into the crypto market, vesting might sound like a lacking feature of cryptocurrency. At first, it may look like it is disabling investors from selling their holdings as per their convenience.
However, we need to understand that vesting in fact is beneficial for both investors and projects. Wondering how it's a win-win situation? Let’s try to understand.
Every legitimate and practical project wants their investors and developers to hold their token for a longer duration unless it is a pump & dump token. Holding the majority of released tokens listed on the exchange helps the project team to have better control over the pricing of the token.
For any project, it is important to have a stability in the value of the token after its listing. It builds trust about the project and its corresponding token amongst the investors. The vesting helps the projects to make sure that the pricing of tokens stays stable and majority of the tokens are being held by investors.
Similar to projects, Vesting is important from an investor's perspective as well. A wise investor always tries to stay away from pump & dump schemes which are very common in the crypto community.
In order to avoid a sudden drop in the price after the listing of a token, vesting or lock-in period is necessary. It prevents investors from immediate sellout of tokens after its listing, thus preventing the dump in the token’s value. We will talk about the importance of vesting in detail later in this article.
A project, while launching their own cryptocurrency, hosts an ICO or IDO to raise funds and list their token on the exchange. The projects sell a specific amount of tokens and allow developers and investors to hold their tokens.
When a particular token is listed on an exchange, it basically gets available for the rest of the people to buy, which naturally increases the value of the token from its listed price. Thus, most of the investors holding the token pre-sale tend to sell the token upon listing at increased value to book their profits.
However, such a sellout creates a sudden dump on the day of listing. To prevent this, a lock-in period, more popularly known as vesting period, is incorporated by projects. A project can decide whether they want to include a vesting period in their listing event or not.
As per the selected vesting period, the tokens are made available for sell-out in batches. Thus, people holding the tokens won’t be able to sell all of their tokens at once, but they can exchange a specific amount of tokens with other assets on the listing day.
Vesting period usually lasts for 6-12 months. Throughout the duration, more and more locked tokens are released and thus creates a healthy environment for all. There are a number of types of vesting periods which we will cover in the next article, for now let's take a look at the importance of vesting.
As you must have figured out by now, vesting has become a very essential part of the crypto world because of all the benefits it brings with it. As time goes by, a lot more startups will start this process to promote themselves. This process will become even more essential as more people join into the blockchain fundraisings.
Vesting is a great way for companies to let the investors own their assets while raising funds for themselves in the market. Vesting is a very intricate process and that is the reason why all the projects should be explained clearly to the investors and founders.
Anyone who invests in these tokens should have sufficient knowledge to make them trust in their investment and that can be done by being transparent about it all. It would be essential for the companies to share the details about the schedules and cliffs of the tokens with everyone involved. Vesting can help a great deal of people if it is executed properly.
So to conclude it all, Vesting is something that will reward all the early investors as they will get a bigger percentage of the token to their name. In the traditional financing sector, vesting is an equity compensation type that would reward the investors in a business's crypto holdings.
For any startup, vesting can be the way to make their way into the crypto market efficiently and it helps in protecting the value of its tokens as well. We hope that this article would have helped you in understanding all the concepts of vesting, its waiting period, etc. If you have any more doubts regarding this, be sure to contact us.
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