The act of restricting the sale of a token for a particular period of time.
Vesting period, also called token lockup period, refers to a period of time in which the tokens sold in the pre-sale of ICO stage are prevented from being sold for a specific period of time. In most cases, tokens are transferable immediately upon receipt, but this is not the case with all projects. The reasoning behind this process varies from project to project and there is no way to know for sure why any given project requires a lockup period.
Most projects have their own unique methods of handling token distribution, so it is always best to ask the team directly if you have questions about the process handling.
There are many different types of lockups, and they're often used in conjunction with other mechanisms like soft caps and bonus tiers. Each has its own advantages and disadvantages.
A healthy token economy requires that most tokens are held by investors and not placed on the market. Locking up tokens allows the team to have a firm grasp of the value of their token. It also disables the developers to sell off their tokens right after the trading goes live, hence, protecting the interest of the holders.
By locking up tokens, projects prevent dumpers from crashing the price as soon as the token gets listed on any exchange. It is usually a part of their anti-dump policy to attract more investors by gaining their trust in the longevity of the project.
Therefore, the lockup period puts restrictions on holders regarding the sale of tokens, hence giving them enough time to rethink their decision.
Here are some of the benefits of having a lockup period:
Protects early investors from large price fluctuations, as sellers will wait for a predetermined duration of time before selling their assets. This provides some stability for the token price and ensures that early participants in the project will have time to use the platform or benefit from it by receiving dividends.
Token lockup provides time for a product to be developed and launched, especially if there is no prototype yet. During this period, investors can evaluate the progress of the project and decide whether they want to hold on to their tokens or exchange them into another currency, such as Ether or Bitcoin.
It also reduces unprofessional hype around projects. Many token buyers see so-called "pump and dump" schemes (when insiders/institutional investors buy cheap and hype up projects in order to sell their assets at higher prices) as unethical.
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