Tokens are at the heart of how protocols and token-issuing crypto companies operate as a unit of ownership and value. They’re often given by protocols to key stakeholders, which can include investors, employees, community members, and advisors.
Usually, these stakeholders don’t receive all their tokens all at once but instead on a schedule - over many months or years. There are different types of schedules used depending on the type of stakeholder and the legal structure used, but broadly speaking the two major types are vesting schedules and unlock schedules.
While these terms are often used interchangeably in the ecosystem, vesting and lockups are uniquely different concepts. In this article, we’ll break down the key differences between each, and explain when and why either (or both) may apply.
Let’s get to it.
1. What’s the difference between a vesting and an unlock schedule?
A vesting schedule is the timeline by which the legal rights to an asset are transferred from the company to the stakeholder, and is typically used when compensating employees, contributors, advisors, contractors, and other service providers.
An unlock schedule is the timeline by which control or custody of a number of tokens is transferred from the company to the stakeholders. These types of schedules can be referred to as lockup schedules, unlock schedules, distribution schedules. Many also use the word "token vesting" to generically mean the transfer or tokens to a recipient on a particular schedule, but this generic use of the term vesting should not be conflated with the legal concept of vesting.
The key difference between the two concepts is around legal ownership vs control.
Vesting pertains to legal ownership, while unlocks pertain to the actual ability to possess and transact with tokens as they are made available on a schedule predetermined by the company. Once tokens unlock, they are either sent from the company to the recipient, or made automatically available via a vesting smart contract (such as the type that Magna provides)
2. When do vesting schedules apply?
Vesting schedules are frequently implemented with service providers, such as employees and advisors, that only receive the rights to tokens based on the amount of time they work for the company. Investors typically don’t need to worry about vesting, as they often already own all the legal rights to the tokens upfront.
Because vesting is applicable to service providers, it if often included in the token grant that is provided as a part of the service provider's compensation (whether that token grant is a Restricted Token Award, a Restricted Token Unit, Token Options, or something else). The vesting schedule typically starts on the first day of employment, and occurs over a pre-defined number of months or years.
Vesting schedules have two main purposes:
Vesting aligns incentives between a company and employees: Vesting employees’ tokens over several years incentivizes them to stay at the company until they are fully vested. Vesting assets can be structured in various ways, such as restricted tokens awards (where the tokens themselves are vesting), token options (which can be exercised once vested), restricted token units (for which tokens can be delivered once vested), or Future Token Interests.
- For example, if an employee receives $100,000 tokens vested over four years and the value of their tokens goes up 10x over time, it may be less enticing to leave before those tokens are fully vested, effectively leaving additional compensation on the table.
Specific vesting structures can combat illiquidity issues: Schedules can require additional conditions to be met before tokens vest, such as the token being live and trading with a minimum amount of liquidity. This can prevent situations where taxes are owed on vested tokens that can’t be sold to cover the tax bill.
- One example is Braintrust’s Future Token Interest program, which includes a liquidity trigger such that tokens are vested only after a certain length of service and a liquidity condition (i.e., live token with a market cap of $220 M and trading volume requirement)
3. When do unlock schedules apply?
Unlock schedules are predetermined by the company and apply broadly to most if not all token allocations. This includes investors, advisors, the community treasury, market makers, and even the company themselves (each set of stakeholders may have their own unique unlock schedule). Each category of stakeholders will typically have their own unlock schedule. While vesting in its legal sense is primarily applicable to service providers, unlocks can be used in flexible ways for many different purposes.
Unlocks usually begin on the day of the Token Generation Event (TGE) when the token becomes live, though sometimes they can also start on another important milestone such as an initial CEX or DEX listing.
Two major reasons unlock schedules are often employed are to:
Control sell pressure: When tokens are released all at once, it can lead to early sell-offs, resulting in downward pricing pressure. By using lockups, company founders can gradually release tokens over time to control liquidity and sell pressure, and prevent early investors or team members from dumping all of their tokens at TGE (Token Generation Event).
Align token holders to the long-term success of the network: Ensuring tokens unlock over time allows the network to scale gradually following launch and incentivizes holders to participate and contribute to the network.
But Unlock schedules can also have other purposes: Companies can unlock tokens to themselves to commit to a spaced-out budget instead of being able to spend all the money at once, unlocks can be used similar to vesting to advisors or other service providers that can quit or be terminated, and more.
4. Can vesting and unlock schedules be used together?
Many companies have both a vesting schedule and an unlock schedule that apply to their employees. Whereas vesting start dates vary by individual based on their employee start date, unlock schedules are broadly determined by a single start date (e.g., TGE or exchange listing). In either case, tokens must both be fully vested and unlocked (where applicable) in order to be considered available to an individual. This makes tracking true distribution amounts operationally challenging and complex.
Magna is one of the only platforms that partners with companies to automate track and account for different vesting and unlock schedules to understand exactly how many tokens their companies should be receiving.
5. What are the parameters to take into account?
Unlock and vesting schedules will have a few key parameters that define them:
- Start Date: When does the vesting start?
- Schedule length: Over how much total time will the tokens vest or unlock?
- Cliff length or initial lockup: How long before the first vesting or unlock event?
- Vesting/unlock frequency: How often will tokens vest/unlock, and how much will vest/unlock at each interval? Vesting is typically monthly, while unlock schedules are commonly monthly, daily, or block-by-block.
Unlock parameters can also be a bit more flexible. Some common parameters include:
- Percent released at the start: Some companies will make a percent of the token allocation immediately available on the TGE date.
- Unlock frequency: The frequency of unlocks can either be continuous or periodic. For continuous unlocks, tokens unlock on a second-by-second or block-by-block basis (referred to by some as token streaming). During a periodic unlock, tokens unlock with a specific frequency such as daily, weekly, monthly, quarterly, or annually.
- Unlock amounts: The amount unlocked every period usually follows a linear process (e.g., constant amount over time), but can also be non-linear (“exponential” is a common non-linear unlock schedule)
6. What should a company keep in mind when implementing vesting and unlock schedules?
Transparency: It's crucial for companies to be transparent about their unlock and vesting terms. Misunderstandings or perceived opaqueness can lead to loss of trust. Tools like Magna can help companies give a dashboard where each stakeholder can view their token vesting and unlock schedules, claim tokens, and view information about the company's tokenomics.
Flexibility: Conditions change, and sometimes companies may need to adjust terms. Having a mechanism for this, while maintaining trust, is essential. This also ties into transparency – companies should be sure to communicate any changes in tokenomics or schedules early to their stakeholders.
Smart Contract Implementation: Effective smart contracts can help automate and enforce these mechanisms on the blockchain in a transparent and trustless way. Magna’s smart contracts support tracking both vesting and unlock schedules, and have been thoroughly audited by top auditors in the industry.
While both involve the gradual transfer of ownership or access to assets, vesting and unlock schedules are used in different contexts, and each method has its own unique underlying principles.
Vesting schedules are often tied to employment and are designed to incentivize performance, while unlock, release, or distribution schedules are more broadly used to control sell pressure after a Token Generation Event (TGE) and align incentives with different parts of the ecosystem. Token management tools like Magna can simplify tracking, executing, and enforcing both of these schedules. If that’s something you think you can help with, reach out to schedule a demo with our team today!
This article is provided for informational purposes only and is not intended to be construed as legal, financial, or tax advice. Readers should not rely solely on the information presented herein and should consult with their own legal, financial, or tax professionals regarding their specific situations. The author(s) and publisher make no representations or warranties concerning the accuracy or completeness of the information contained in this article. Reliance on any information provided in this article is solely at your own risk.