When it comes to cryptocurrency projects, vesting is a method that locks up tokens for a predetermined amount of time before the owners are free to sell or transfer them.
The tokens are released gradually in accordance with a predetermined schedule rather than being distributed in large quantities to team members, founders, advisors, early investors, or even some community contributors all at once.
This structure, in which employees gradually earn their shares to promote long-term commitment, is directly derived from traditional finance and startup equity practices. It has a similar function in cryptocurrency, but because tokens can be traded instantly on open markets, the stakes are even higher.
A cliff is part of a standard vesting schedule. Here, there is a first lock-up period that lasts for six to twelve months and during which no tokens are issued. Someone could lose everything if they quit the project before the cliff ends.
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Tokens unlock in increments of one to four years after the cliff passes, typically on a monthly or quarterly basis. A typical structure might be, for instance, a one-year cliff followed by linear monthly releases over the following two to three years.
Vesting is primarily used in projects for simple and useful reasons. First, it avoids “dump” scenarios, in which insiders cash out large sums immediately after launch, causing the price to plummet and undermining community confidence.