12 min read
“Capital has no loyalty” is a famous phrase that we have seen materialized hundreds of times, from the world of traditional finance to the crypto ecosystem, in a wide variety of projects.
The creators of decentralized applications and their managers must constantly plan different strategies to retain the initial capital and not become another “pump and dump” sad story.
So why not turn to a resource born in the traditional world and adapt it to our environment? Knowing what cryptocurrency vesting is, you can find out what awaits you in a project that proposes it.
So, what is vesting?
Vesting is a method of retaining the capital invested in a project, through the return in kind of this investment in small installments or parts during a previously established period of time.
It should be noted 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 this is not the end of the problem.
A large number of startups were able to raise the initial capital and start with the tasks that needed that cash flow. However, the next hurdle was to retain that capital. As I pointed out at the beginning of this article, we already know that capital has no loyalty and can often be impatient. So how do we retain capital initially, in order to reach the levels of development that will attract it on its own?
The concept of vesting may provide a good indication of how to do this.
Vesting, a practical example
Nothing better than an example to understand a new concept. Let’s think about the following situation, an incipient startup intends to develop an application to incorporate payment via cryptocurrencies in the Apple Wallet function.
Excellent project, isn’t it? Now, this company must outline its “roadmap”, set milestones to be achieved over time and give the necessary explanations, in order to find the desired funding. Let’s 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 the capital towards the new neighboring company?
This is where vesting makes its triumphant entry. This startup could offer its investors the following deal:
- We make available to our investors 50% of the shares of this company (let’s imagine that in this case, they are shares).
- The total distribution of these participations will be made over a period of 48 months. Provided for in the following schedule:
- 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 we begin to understand what vesting is in the traditional financial/business world, we can already begin to envision the myriad of opportunities for the blockchain ecosystem.
Without further ado, let’s get down to it.
Vesting in cryptocurrencies
If you have been investing and researching in the crypto environment 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 is still in its infancy, is the freedom to innovate and, from my point of view, the possibility of bringing it closer to the “ordinary” user. 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 a certain amount of capital for a certain period of time.
But of course, here the times are different, I never tire of repeating that a week in DeFi is months in the real world…
Therefore, let’s take a look at some of the uses that have been given to this concept in the cryptocurrency environment.
Vesting Cases in the Crypto Ecosystem
As I remarked in the previous paragraph and as I usually do in my articles, one of the strongest points of the environment developed around blockchain technology is the impressive capacity for innovation.
Based on this premise, it will not be surprising to find that the concept of Vesting has been applied for very different purposes in this area.
We have examples ranging from financing 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, and I will not leave out the latest trend in the environment, the DeFi 2.0 platforms, which use this concept as a method of “engagement”.
Let’s tackle cryptocurrency vesting once and for all.
Vesting as a method of financing blockchains
Although the most famous ICO is probably the one made to finance the birth of the Ethereum network, it was not the first. There was a project called Mastercoin, which according to his own words inspired Vitalik Buterin in terms of certain ideas, which was financed through an ICO combined with the concept of Vesting.
For those of you who are newer, I would like to clarify that an ICO translates as Initial Coin Offering. This method of financing proposes to offer the cryptocurrencies or tokens of a project in exchange for an investment, either in FIAT money or another cryptocurrency.
In the case of Mastercoin, in 2013, they chose BTC as their investment, raising around 5,120 BTC. In return they gave away their own tokens at a ratio of 1 BTC = 100 Mastercoins. This initial return was accompanied by an extra 10 Mastercoins per week for each BTC invested, with a vesting period determined by the completion of the sale of their token.
In this way, the team ensured that investors did so as soon as possible, in order to receive those 10 extra Mastercoins for as long as possible.
If we talk about funding 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, featured a Vesting period divided into two parts:
- As of August 2020, DOTs were released for transferring
- In mid-January 2021, DOTs were released for recall and marketing.
While investors awaited the Vesting period, the team behind Polkadot worked 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 ratio in terms of final benefits. Decentralized applications apply Vesting to create and capture value in their own smart contracts and attract investment.
At the dawn of the 2020 “DeFi Summer”, several of them applied this method. The case of Curve and Synthetix, both Ethereum network protocols, resonate among the most renowned.
While Compound and other apps offered, in exchange for an investment or deposit on their platform, their own governance tokens as immediate rewards, Curve and Synthetix chose the path of Vesting.
What did they avoid with this mechanism? That the price of their assets plummet immediately and become a new example of “capital has no loyalty”. Users of these platforms had to wait 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 would have sold his rewards immediately, without the existence of a Vesting period, would have received a much lower amount of stablecoins.
Vesting as anti-cyclical protection
This is a strategy commonly implemented by Proof of Stake networks when releasing delegated native coins with their blockchain validators.
A prime example of this strategy are all the networks of the Cosmos ecosystem. The Tendermint consensus method, used by the blockchains mounted on this infrastructure, uses a vesting period to get the native coins of each network, delegated with the validators that reaches 21 days.
This not only protects the price of native network currencies, but also prevents a massive withdrawal of delegated currencies.
Let’s imagine the case of a dramatic rise of one of these currencies. In the absence of the vesting period, excessive selling animosity could leave the network devoid of its greatest security tool, the staking of native currencies.
Vesting as capital retention and attraction in DeFi 2.0
The new platforms, most of which have emerged as “forks” or copies of OlympusDAO, known in the industry as DeFi 2.0, use Vesting as an essential instrument for capturing the value they propose and need to sustain themselves.
On these platforms, we can either buy your token directly or “mine” it. With the latter option, we buy that token at a discount, but we must adhere to a Vesting period, usually about 5 days.
During this period, those who have mined will receive small amounts of the token in question, until the end of the Vesting period. At that moment, the user will have the total amount “minted”.
Now, let’s explain the subtitle, why do I consider that Vesting, on these platforms, is also a method to attract capital?
Suppose a user “mints” OHM, the OlympusDAO token, and while waiting for the vesting period notices that the platform works well and that the returns are really attractive, this user is likely to invest more capital in the platform.
Benefits of vesting for users
So far, a lot of ink on how different projects can benefit from the Vesting concept. But how can we, the ordinary users, benefit from this concept?
Although I have mentioned these benefits during the course of the article, let’s make them clear. From the user’s point of view, I find two major benefits:
- 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.
Cryptocurrency Vesting Limits
Now that we know what Vesting is and how it is applied to cryptocurrencies, we can decide whether this modality suits our profile or our objectives as investors or investment generators.
Of course, this is an optimal tool for nascent projects seeking to retain capital or value in their early days.
In any case, the crypto world works with an extremely different clock than the traditional world. Time in our ecosystem is a precious commodity, so Vesting must be applied with restraint and respect for users.