Token Lockup in Crypto Presales – Key Insights

Token presale is an event when native tokens of an upcoming project are put up for sale ahead of their launch in the market. The core objective is to support its development while building a community. It also faces certain restrictions – one of them being a rapid sale of those native tokens when they are launched for trading. This causes a decline in their value due to an imbalance in demand and supply. Thereby, affecting not just the prospects of the project but also its future roadmap.

Projects have now introduced token lockup to prevent such happenings. It serves benefits largely to the community and developers as they can secure macro interest. Suffice it to say, that the token lockup mechanism remains important for investors of a presale process.

What is Token Lockup?

When token sales happen during the presale period, project developers offer it to interested investors at a huge discount. It attracts more investors who make their contributions in small sizes, yet make up for a major portion of the fund pool. However, it becomes more imperative to safeguard the interest of the ecosystem. Token lockups enable developers to keep the pool intact for a certain time. Alternatively, they can decide to establish token lockup on multiple grounds like milestones and performance.

It is often implemented during ICOs or presales to secure token prices in the future. Token lockup is backed by incentives and rewards for holders. The mechanism is executed leveraging the strengths of technologies like smart contracts. Once implemented, token lockup works to prevent unauthorized transfers and sales in the market. Thereby, maintaining a sustainable balance for the ecosystem.

Token Lockup Strategies

There are different types of strategies based on the token lockup structure. This includes time-based, milestone-based, performance-based, and tiered token vesting periods.

Time-based Lockup

As the name suggests, a Time-based Lockup is a mechanism where developers lock tokens for some time and then make them available for trading and/or exchange. Some of the best crypto presales are known to adopt a Time-based Lockup strategy mostly because it is simple to adopt and execute. Plus, it instills confidence among investors.

Milestone-based Lockup

Milestone-based Lockup refers to releasing presale tokens for trading and exchange once a certain milestone is achieved. It could be anything including, but not limited to, completing a certain part of development, or making it to the exchange platforms. Lockup till the mainnet launch is another common ground for the Milestone-based Lockup strategy.

Tiered Token Vesting Period

Tiered token vesting period refers to releasing tokens based on stages that have been decided in advance. The idea is to make sure that there is sufficient liquidity in the ecosystem for every stage. For example, 10% of the supply can be released when the project completes 30% of development. The next tier could happen upon 50% completion of the project.

Performance-based Lockup

Tokens, according to Performance-based lockup, are released only after certain performance metrics have been completed. It often gets mixed with Milestone-based Lockup and rightly so, for they are similar in terms of foundational principles. Except, Performance-based Lockup can include aspects of profitability or partnerships.

Founders choose the one that best meets their requirements. Participants in crypto presale should go through such conditions before allocating their portfolio to any such project.

Purpose and Benefits of Token Lockup

Some of the reasons and benefits of token lockup are discussed below.

  • Price Stability: Token lockup helps to maintain price stability. Sale in huge volumes, or unpredictable amounts, can lead to steep declines – further hampering the prices of the presale tokens which were originally poised to fetch better returns.
  • Market Integrity: Market integrity refers to maintaining morals around the ecosystem. Participants of presale often get their hands on the token to make instant sales and take profits home. However, that ends up affecting those who genuinely seek the prosperity of the project in the long term.
  • Long Term Commitment: Token lock-up encourages long-term commitment. It, therefore, effectively mitigates the need to hold presale tokens for the short term. Making it more effective is the idea of rewarding holdings with higher incentives like bonuses or exclusive access to ‘behind the scenes’ of a project, or even interaction with founders.
  • Building Investor Confidence: Investors feel more confident about their investments when holdings are protected against unnecessary selling activities. Plus, it helps them to verify the commitment and growth of the founders. Investors are more likely to fuel funds to the project when they are assured of the token lockup period in advance.

Suffice it to say, that crypto presale projects backed by a specific token lockup strategy are bound to see a stronger community and growth.

Token Lockup Mechanism in Cryptocurrency Presale

Any crypto ICO that offers token lockup follows a certain mechanism of the concept. The token lockup mechanism majorly includes smart contracts and vesting schedules.

  • Smart Contracts help to execute transactions autonomously. Founders are not required to interfere and investors are more confident about it. The terms and conditions of a smart contract may vary based on the project. The basic idea remains the same, which is to release the token at an agreed time or phase.
  • The vesting schedule is the period when tokens are released. The grounds to finalize the vesting schedule differ with the same objective of having a time window in practice so that investors have access to their holdings.

Cryptocurrency presale can follow either a single token lockup mechanism or multiple depending on their core strategies.

Conclusion

Crypto presales serve as a foundational part of a project by helping them to raise funds and support innovation. However, investors seek protection for their participation, and token lockup does precisely that. It could be on different mechanisms and different strategies but the fundamental aspect remains the same.

NameCoinNews Team
NameCoinNews Team

The authors of NameCoinNews, a team of cryptocurrency enthusiasts and afficionados, are dedicated to providing trustworthy, timely, and informative news regarding cryptocurrencies. Each writer brings a wealth of experience and a unique perspective to the table, ensuring that our readers are well informed on the latest crypto developments and trends.