The creators of decentralized applications and their administrators must constantly plan different strategies to retain the initial capital and not become another sad “pump and dump” story.
So why not resort to a resource born in the traditional world and adapt it to our environment? Knowing what cryptocurrency vesting is, you will be able to know what awaits you in a project that proposes it.
It is necessary to highlight that the vesting boom was accompanied by the violent growth that Startups saw a few years ago. For a new company, with a small structure, it can be a complex task to obtain financing or initial capital. But the problem does not end here.
A large number of Startups managed to obtain initial capital and start with the tasks that needed that flow of money. However, the next hurdle was retaining that capital. We already know that capital has no loyalty and can often be impatient. So, how to retain capital initially, to reach levels of development that attract it on its own? In the concept of vesting there may be a good indication of how to do it.
Index of contents
Vesting, explained with a practical example
Vesting in cryptocurrencies
,Vesting Cases in the Crypto Ecosystem
Vesting as a blockchain financing method
Vesting as value capture for decentralized applications
Vesting as anti-cyclical protection
Vesting as capital retention and attraction in DeFi 2.0
Smart contracts are essential for vesting
Conclusions
Benefits of vesting, for users
Vesting limits in Cryptocurrencies
Vesting, explained with a practical example
There is nothing better than giving an example to understand a new concept. Let's think about the following situation, a fledgling Startup intends to develop an application to incorporate payment via cryptocurrencies into the Apple Wallet function.
We started well there, now, this company must outline its “roadmap”, mark milestones to be achieved over time and give the necessary explanations, to find the desired financing. Suppose that a first presentation, in a financing round, is successful and investors decide to contribute, how does this Startup ensure that an incalculable delay will not catapult capital to the new neighboring company?
This is where vesting makes its entrance. This Startup could offer its investors the following agreement:
Offer investors 50% of the company's shares (let's imagine that, in this case, they are shares)
The total distribution of these shares will take place over a period of 48 months. Provided in the following scheme:
15% in the first 12 months
15% between months 13 and 24
20% between months 25 and 36
50% between months 37 and 48
Now that you understand what vesting is in the traditional financial/business world, we can begin to glimpse the endless opportunities for the blockchain ecosystem.
Vesting in cryptocurrencies
If you have been investing and researching Cryptocurrencies for some time, you have probably come across some proposal of this style. Vesting is undoubtedly an extremely appropriate method for the world of cryptocurrencies.
Undoubtedly, the best thing about this ecosystem, which continues to be incipient, is the freedom to innovate and the possibility of bringing the “ordinary” user closer. These possibilities are unimaginable in the traditional financial system.
Today, thanks to this ecosystem, anyone, no matter how small their available capital, can become an investor.
Crypto vesting is a tool that allows decentralized applications to secure certain capital for a certain period of time.
But of course, the times here are different, considering for example that a week in DeFi is months in the real world...
Therefore, let's look at some uses that have been given to this concept in the cryptocurrency environment.
Vesting Cases in the Crypto Ecosystem
One of the strongest points of the environment developed around blockchain technology is the impressive capacity for innovation.
Starting from this premise, it will not be surprising to find that the concept of Vesting has been applied for very different purposes in this area that brings us together.
We have examples that range from the financing of a project of enormous magnitude, such as a blockchain itself, to financing decentralized applications. We also have the widespread case of Vesting as anti-cyclical protection, which certain Proof of Stake blockchains use in their delegation systems. This also includes the latest trend in the environment, the DeFi 2.0 platforms, who use this concept as an “engagement” method.
Vesting as a blockchain financing method
Although the most famous ICO was probably the one carried out to finance the birth of the Ethereum network, it was not the first. There was a project called Mastercoin, which in his own words served as inspiration for certain ideas for Vitalik Buterin, which was financed through an ICO combined with the Vesting concept.
For those newer, an ICO translates to Initial Coin Offering. This financing method proposes offering the cryptocurrencies or tokens of a project in exchange for an investment, either in FIAT money or in another cryptocurrency.
In the case of Mastercoin, in 2013, they chose BTC as an investment, collecting around 5,120 BTC. In exchange, they delivered their own tokens at a ratio of 1 BTC = 100 Mastercoins. This initial return was accompanied by 10 extra Mastercoins per week, for each BTC invested, with a vesting period determined by the completion of the sale of its token.
In this way, the team ensured that investors did so as soon as possible, to receive those 10 extra Mastercoins for as long as possible.
If we talk about financing and vesting, we cannot fail to mention Polkadot. The Polkadot team raised money in different public and private sales of its network's native cryptocurrency, DOT. The last private sale, held in July 2020, had a Vesting period divided into two parts:
As of August 2020, DOTs were released to transfer
In mid-January 2021, the DOTs were released for retirement and marketing
While investors awaited Vesting's term, the team behind Polkadot was working around the clock to deliver a quality product and retain that capital.
Vesting as value capture for decentralized applications
A smaller scale in terms of development, but not necessarily the same relationship in terms of final benefits. Decentralized applications apply Vesting to create and capture value in their own smart contracts and attract investments.
At the dawn of the “DeFi Summer” of 2020, several of them applied this method. The case of Curve and Synthetix, both protocols on the Ethereum network, resonate among the most renowned.
While Compound and other applications offered, in exchange for an investment or deposit on their platform, their own governance tokens as rewards immediately, Curve and Synthetix chose the Vesting path.
What did they avoid with this mechanism? May the price of its assets collapse immediately and become a new example of “capital has no loyalty.” Users of these platforms waited up to 365 days to see their tokens released.
This period brought benefits for both parties, of course the benefit for the platforms. Now, any user who had sold their rewards immediately, without the existence of a period.
Vesting as anti-cyclical protection
This is a strategy commonly implemented by Proof of Stake networks, when releasing native currencies delegated to the validators of their blockchains.
An example of this strategy is all the networks in the Cosmos ecosystem. The Tendermint consensus method, used by the blockchains built on this infrastructure, uses a vesting period to obtain the native currencies of each network, delegated to the validators that reach 21 days.
In this way, not only is the price of the network's native currencies protected, but a massive withdrawal of the delegated currencies is avoided.
Let's imagine the case of a resounding rise in one of these currencies. If the vesting period does not exist, the great wave of excessive selling could leave the network devoid of its greatest tool in terms of security, the “staking” of native currencies.
Vesting as capital retention and attraction in DeFi 2.0
The new platforms, mostly emerging as “forks” or copies of OlympusDAO, known in the environment as DeFi 2.0, use Vesting as an essential instrument in capturing the value they propose and need to sustain themselves.
On these platforms, we can buy your token directly or “mint” it. With this last option, we buy that token at a discount, but you should know that we must stick to a Vesting period, generally about 5 days.
During this period, those who have minted receive small amounts of the token in question, until the end of the Vesting period. It is at that moment that the user will have the total “minted” amount.
Now, I will explain it to you more in context, why is Vesting, on these platforms, considered a method to attract capital?
I'll illustrate it with an example: Suppose a user "mines" OHM, the OlympusDAO token, and while waiting for the vesting period, notices that the platform works well and that the returns are really attractive, it is likely that this user invest more capital in the platform. But it can happen that the price turns around and we already know what happens in those moments, fear comes.
Smart contracts are essential for vesting
Tokens designated for vesting are typically locked by a smart contract, and access to them is sealed until a set of conditions written into the smart contract are met.
Without an effective smart contract, the award process can be manipulated or circumvented by malicious actors, affecting the project and its investors. Smart contracts are not foolproof and must be audited and tested for vulnerabilities to ensure a secure award process.
To confirm the trustworthiness of a project, it has become standard practice for cryptocurrency startups to outsource the inspection of their Smart Contracts to trusted third-party auditors such as SolidProof and Certik. For example, SolidProof has successfully audited and helped secure over 400 crypto projects and earned a stellar reputation in the process.
Using manual and state-of-the-art automated testing, the Germany-based company strives to ensure that smart contracts are up to par and that grant protocols are met, as well as other key aspects of a crypto project. SolidProof also offers a comprehensive KNOW YOUR CUSTOMER (KYC) process. The KYC process is the industry standard for authenticating the identities of people behind crypto projects and helps build trust for a startup among potential investors.
Benefits of vesting, for users
So far, we have seen how different projects can benefit from the Vesting concept. But how can we, ordinary users, benefit from this concept?
From the point of view as users, these are two great benefits:
The Vesting period is a very beneficial forced savings in successful protocols, examples like Curve and Synthetix prove it.
On DeFi 2.0 platforms, it can serve as a trial period to get to know these platforms and reinvest in case of a good experience.
Vesting limits in Cryptocurrencies
Now that you know what Vesting is and how it is applied in cryptocurrencies, you can decide if this modality suits your profile or your objectives, as an investor or investment generator.
Of course, it is an optimal tool for nascent projects that seek to retain capital or value in their early days.
In any case, the crypto world works on an extremely different clock than the traditional world. Time in our ecosystem is a very precious value, therefore, Vesting must be applied with moderation and respect for users.
Conclusions
We can affirm that vesting is a mechanism that any company can use to ensure that its investment partners and employees stay in the business. This, given that the vesting penalizes departure outside the established times, which ensures that the company will have investors and employees in a stable manner during the time of the vesting.