When managing token vesting, protocols often come to us with a critical decision to make: how should they distribute their vesting tokens to stakeholders?
We often meet projects that face the challenge of managing dozens, hundreds, and sometimes even thousands of stakeholders. These stakeholders can include employees, contributors, VCs, crowdfund investors, or community members that need to receive their tokens with an associated vesting schedule or unlock schedule (sometimes both, and sometimes with different classes of stakeholders with their own schedules!).
At Magna, we often help protocols set up their token vesting in one of a few different structures, including:
- Periodic airdrops: Direct transfers to stakeholders’ wallets on a regular basis (which we call the “airdrop approach”), using a tool like Magna to track the exact schedules and unlock dates.
- Claim-based escrow vesting contracts: Tokens are deposited into a vesting smart contract from which recipients can claim after unlock milestones pass (which we call the “vesting smart contract” approach). Projects use Magna's audited smart contracts configured with the unlock schedule logic (whether it's monthly, daily, continuously, with a cliff, or with other custom release parameters).
No matter the structure, we ensure that recipients are able to receive their tokens accurately and on-time.
Each one has its strengths in different use cases. The Airdrop approach requires periodic action from the project to process the transfer, but no action (or gas fees incurred) on the part of the recipients. It’s particularly well-suited to specific situations such as:
- When Restricted Token Units (RTUs) where tokens are not always immediately available on the vesting date) are involved;
- In cases where taxes need to be withheld at each distribution; or
- In cases where the project needs to keep the tokens in a specific place (e.g. custodian vault or separate staking infrastructure).
On the other hand, vesting contracts can make it easier for a project to “set it and forget it” - depositing tokens into an escrow contract that handles the unlock schedule logic. Recipients can claim from the contract as the vesting milestones occur. These contracts also often include optional parameters that apply to specific situations such as:
- Cancellation, such in the case of an employee termination and necessary repurchase
- Full revocation of tokens in the contract, in the case the recipient wallet is hacked
- Delegation, should recipient addresses change; and
- Immutability, for transparency.
Vesting contracts such as Magna’s also support not needing to deposit all tokens in the contract – the contract can be partially funded and then topped up periodically.
In this post we’ll break down each approach, discuss the risks and overhead associated with each, and highlight the benefits & trade-offs to understand why many protocols opt to use a trusted platform like Magna over handling in-house.
Note: For this post we refer to “token vesting” in its common industry usage to mean the general distribution of tokens to a stakeholder along a particular schedule. True “vesting” has specific unique legal and tax connotations within the context of employee compensation structures that we will dive into in a separate upcoming post.
Note: Airdrops conducted in bulk are generally also facilitated using a smart contract.
The airdrop approach
The conceptually simplest way to distribute vesting tokens is for projects to send (AKA airdrop) them to their stakeholders as they become available at each vesting milestone. Projects will periodically conduct distributions (either done one at a time manually or executed in bulk) to their stakeholders for the appropriate amount.
Strengths and tradeoffs of the airdrop approach:
Airdropping vesting tokens can be beneficial for the following reasons:
- No work required by the receiving stakeholder – The tokens show up in the stakeholder’s wallet immediately, as tokens are sent directly. Recipients don’t need to spend gas to claim.
- No escrow necessary – When distributions involve large amounts of tokens, some projects may feel more comfortable keeping custody of their tokens until the time of distribution, particularly if they are using a custodian or staking their tokens - avoiding the need to transfer the tokens elsewhere (e.g., locking up tokens in a smart contract).
- Operational flexibility – Projects can distribute tokens when it is convenient for them, and it is easier to make changes on the fly to tokenomics, unlock schedules, or recipient wallet addresses.
- Taxes – Tax rates can change as stakeholders relocate, token go up, and a myriad of other reasons. With the airdrop-based approach, taxes can easily be calculated for each distribution to ensure compliance with tax regulations and an accurate understanding of the tax burden by all parties.
- RTU workflow – With RTUs, token settlement/distribution can occur after the vesting date, and companies may need more control over the exact timing of the settlement.
Simultaneously, airdrops also have several trade-offs:
- Increased responsibility for the projects - Projects who opt to airdrop tokens are perceived to be fully responsible for the accurate delivery of tokens, which can become problematic when things go wrong. And if a stakeholder loses access to a wallet that tokens were airdropped to, those tokens may be irretrievable.
- Operational overhead – Distributions can require a lot of effort to organize and coordinate (leaving a lot of room for potential error), particularly if managed solely through spreadsheets. Protocols need to make sure that they’re accurately tracking token release dates and amounts, collecting and testing stakeholder wallet addresses, and scheduling transactions on-time.
- Dependent on stakeholder trust in the project team – Since there is no binding on-chain agreement or evidence that tokens have been truly set aside (as there is in a smart contract) to adhere to the vesting schedule, stakeholders must trust the project team to carry out their responsibilities correctly and on-time, and maintain said trust for the length of the vesting schedule (usually many years). There are some workarounds, for example, by entering into legal agreements with custodians who are then contractually obligated to distribute tokens as specified by the project, but these can be complex and costly to implement.
Token vesting tools like Magna offer the following to streamline airdrop-based token vesting for protocols:
- Built-in tracking of vesting/unlock schedules, particularly for complex schedules (e.g., use of both vesting and unlock schedules together, and with features like cliffs).
- Simple UX and gas-optimized airdrop contracts for executing bulk on-chain transfers.
- Integration with Human Resources Information System (HRIS) providers for easy distributions of tokens net of the withholding amounts.
The vesting smart contract approach: escrow contracts and claim portals
The other approach projects take for token vesting management is to utilize vesting smart contracts. These smart contracts act as an escrow mechanism, wherein tokens are deposited by the project into the contract and can be claimed by the recipients as unlock milestones occur.
Strengths and tradeoffs of the vesting smart contract approach
There are many benefits to leveraging vesting contracts for token vesting:
- Convenience for projects – As opposed to airdrops, projects are able to “set it and forget it” - depositing tokens into the contract allows recipients to claim as the unlock milestones are met without any additional work required by the project. While this sometimes requires relinquishing control upfront of all tokens subject to vesting, platforms like Magna allow you to fund as you go, topping up the contract with tokens periodically while still allowing the schedule to be viewed on-chain by stakeholders.
- Low ongoing overhead – Manually distributing vesting tokens for stakeholders on different unlock schedules with different unlock amounts can be a headache, leaving room for human error in tracking the schedule and scheduling distributions. By configuring the schedules in a smart contract, projects can ensure that the right number of tokens are released to the right stakeholders at the right times.
- Stakeholder-verified receiving addresses – By requiring recipients to claim from a smart contract, the recipient also demonstrates control over their wallet, removing the potential for projects to inadvertently distribute to incorrectly provided addresses.
- Transparency – Since the vesting schedule is encoded in the smart contract, stakeholders can see the amount locked up in the contract, the exact time tokens will be released, vesting amounts at each milestone.
- Optional immutability- Vesting smart contracts often provide projects the ability to cancel or revoke ongoing distributions, adding another layer of flexibility. However, vesting contracts often have the ability to be configured as immutable - meaning that they can’t be canceled or changed in any way once live in an effort to assure stakeholders that the vesting schedule is adhered to.
There are some tradeoffs to the smart contract claim approach:
- Meaningful expertise and resources required – There is up-front overhead to writing the smart contracts and ensuring they contain the right functionality that projects might need as they grow. Auditing smart vesting contracts can be expensive.
- Action required for stakeholders – As opposed to an airdrop where tokens appear directly in stakeholder wallets, receiving vested tokens via smart contract requires stakeholders to claim the tokens from the smart contract.
- Stakeholders pay gas fees – In order to claim tokens vested through a smart contract, the stakeholder is responsible for paying gas fees. While this may not be problematic for the distribution of community rewards, projects may prefer to cover the gas for individuals who receive vesting tokens as a form of compensation.
- Smart contract risk – Since smart contracts live on-chain and are fully transparent, meaningful risk exists for potential security breaches. Contracts should be thoroughly audited to ensure that any deposited tokens are safe (I’m glad you asked - Magna’s vesting contracts are regularly audited by well-known third parties).
How Magna streamlines the vesting smart contract approach:
- Audited, gas-efficient smart contracts that contain key parameters that projects often need (top-up support for practical funding, cancellability, revocability, immutability, and more).
- Magna can track complex schedules, including when employees have both a vesting schedule separate from an unlock schedule.
- Support for different schedule terms including monthly vesting, daily, vesting, second-by-second vesting, and more.
- Multi-network support: Projects may decide to change the chain they’re working with prior to their full token launch. Magna supports all EVM chains as well as Solana.
- Streamlined UX for on-chain actions including contract deployment, depositing tokens, configuring schedules, and more.
- Claim Portal for recipients to easily view their allocations, claim unlocked tokens, and see their full schedule.
Why not both?
One thing we always mention to projects is that they can use both approaches within Magna, particularly for different stakeholders. We've seen projects, for example, use an immutable Claim-based vesting structure for international investors, a claim-based approach for employees (with cancellability in case of termination), and an airdrop-approach for the largest lead investors so that the bulk of their tokens can stay within a qualified custodian.
We've also seen projects start off with an airdrop approach and later lock up the rest of the tokens. We're here to support projects no matter what operational constraints they may have.
Airdrops and smart contract-based claiming are two viable methods for ensuring vesting tokens are properly distributed to a project’s stakeholders.
Airdrops are simple, direct, and flexible - and remove the need for the tokens to move from project wallets until sent to the stakeholder. However, airdrops can incur ongoing operational overhead on the part of the project, particularly when multiple vesting schedules running on different timelines are involved. Projects also assume not only greater responsibility for accurately delivering vesting tokens, but all the associated gas fees as well.
Conversely, smart contract-based claiming is easy, automated, and transparent - abstracting away the need to send transactions at the end of every vest period. However, using smart contract-based claiming demands significant attention to development time and security. While some teams may create their own vesting contracts, this consumes substantial development resources and necessitates rigorous, often costly, audits. Contracts must be future-proof, as projects' requirements regarding unlock schedules and claim functionalities may evolve. Additionally, teams have to design a user-friendly claim portal for stakeholders to view allocations and upcoming vesting dates.
Managing token vesting yourself can be difficult and costly. Whether it’s tracking different schedules across stakeholders, ensuring that the right amounts are distributed, or writing and auditing vesting smart contracts, there’s a reason that projects turn to token vesting management platforms like Magna to streamline the process.
For projects seeking to periodically airdrop vesting tokens to stakeholders, teams can input the vesting schedules upfront - allowing the platform to track the amount of tokens that should be sent at any given time and to whom. While you will still need to sign the transactions with every vesting milestone, all the operational work is done ahead of time.
For claims-based vesting, Magna provides pre-audited smart contracts and claim portal infrastructure. Magna's contracts have been audited by leading firms like Trail of Bits and Zellic, Ottersec, and offer various parameters for unlock schedule customization and token revocability.
And if projects desire, we can set them up with either structure for different stakeholders, or change it down the road.
If you are interested in leveraging Magna’s token vesting management infrastructure, reach out to us today!