Token unlocks generate a large shift in the circulating supply of tokens and provide critical revenue for the project to begin its development path.
However, is token unlocking meaningful to investors? Should investors be aware of upcoming token unlocks? How does a token unlock affect the token’s demand, price, and general market perception of the project?
In this piece, we will look at the mechanics of token unlocks, their importance to crypto projects, the benefits they provide to investors, founders, and the crypto community as a whole, and what occurs when a crypto project unlocks tokens.
What is Token Unlock in Crypto?
For a blockchain project or network, a token unlock is a crucial component of token administration. Token unlocking is the act of transferring previously locked tokens into the private crypto wallets of partners, team members, or initial investors so they can be freely traded on the market.
Usually, this token transfer into investors’ wallets is done at a cheap cost, allowing the unlocked tokens to enter the free-market dynamics of supply and demand to establish their actual market value.
Token unlocks are usually carried out in accordance with the project’s programs or fundraising round or rounds. Consider token unlocks to be comparable to public firms issuing fresh stock market shares.
The supply of tokens is increased by a certain amount upon token unlocking. It is a meticulously organized event to guarantee the best possible token release and delivery through merchants and prevent an oversupply scenario that would cause a price decline.
The token unlock and distribution process involves a number of parties, including investors, platform users, project creators, and the cryptocurrency community.
For investors, token unlocks could offer a variety of options. They may cause significant churn in the cryptocurrency market by causing large trade volumes, influencing market dynamics, and introducing price volatility.
How Does Token Unlock Work?
Usually kept in smart contracts on the project’s blockchain, locked tokens are only released in response to specific, predetermined circumstances. The token unlocks function by releasing a predetermined quantity of tokens under predefined circumstances or intervals.
A project’s whitepaper often contains the specifics of these periods or conditions. Token unlocks are typically correlated with the token-generating event (TGE) of the project. A TGE is the technological creation of a new cryptocurrency token by a blockchain-based company.
An initial coin offering (ICO) or public sale usually comes after this. Token unlocks are scheduled to take place after a set amount of time following the TGE. Smart contracts, which are computer programs that carry out the terms of an agreement, automatically release tokens.
When specific requirements are satisfied or at predefined intervals, smart contracts proceed to release tokens. Token unlocks increase the number of tokens in circulation, which temporarily disrupts the dynamics of supply and demand and dilutes the price. Additionally, significant overselling and a brief downward trend for the token could be brought about by token unlocks.
Only 15–25% of the entire supply of relatively young cryptocurrency projects, like Optimism (OP), Dymension (DYM), and Pyth Network (PYTH), is now in circulation; most of their tokens have not yet been added to the open market for trade.
Given that over four times as many tokens as are now in circulation are expected to enter the market, this scenario sets the stage for extreme volatility.
Cliff Unlock Vs. Linear Unlock Comparison
Token unlocks are classified into two types: cliff unlocks and linear unlocks.
The linear unlock is defined as the process of unlocking a set number of tokens on a regular basis, such as monthly, biannually, yearly, biannually, etc.
The linear token unlock approach is known to reduce the influence of token unlocks on the token’s current market price. It boosts investor confidence since it avoids an oversold scenario with tokens.
Solana (SOL) has a linear unlock schedule of 66.54k SOL every day. The circulating supply of Solana (SOL) is 468.25 million, with a total supply of 584.61 million. Avalanche (AVAX) unlocks 9.5 million AVAX every three months, for a total supply of 720 million AVAX and a current circulation rate of 405.86 million AVAX.
With the Cliff unlock method, tokens are issued in one lump sum on a designated date after a period of no token releases. It is referred to as a “cliff” when tokens are abruptly released into the market after a period of no token releases.
Cliff unlock has certain drawbacks, including abrupt price swings, excess inventory, shifts in market sentiment, and more. Among the well-known cryptocurrency projects that employ the cliff method for token unlocking are Arbitrum, Optimism, Sui, and Aptos.
Cliff token unlocks’ main benefit is that they guarantee stakeholders’ commitment to a project for a set amount of time. Additionally, the duration of the cliff phase may change based on the allocation’s goal.
For instance, tokens provided to advisors and investors may have a longer cliff time than marketing and partnerships. This increases the project’s ability to control the total amount of tokens in circulation as well as their liquidity.
Impact of Token Unlock on Cryptocurrency
The supply and demand dynamics of the market are momentarily upset by token unlocks. Unlocks are known to cause a bearish trend in the market since they increase the amount of the token in circulation, which reduces demand and lowers the token’s price. Token holders are usually under pressure to sell when there is an excess.
Token unlocks, however, have a far greater impact on the cryptocurrency world than just acting as a temporary circuit breaker in a token’s market dynamics. Actually, the effects of token unlocks start to manifest even prior to the actual unlock.
The token’s price may rise as the project moves closer to a token unlock. This is entirely because cryptocurrencies are speculative, and it is made worse by the fact that the project is getting closer to another milestone or token unlock accomplishment.
The price of the token may normally decrease when it is unlocked for a number of reasons, such as:
- When the token’s supply outpaces its demand, the price decreases.
- Poor trading pairs on decentralized crypto exchange platforms, such as Uniswap.
- large unlock volumes that alter the dynamics of the free-hand market.
- Market uncertainty and speculation
Token unlocks provide numerous advantages for the token and the platform as a whole after this phase of supply-demand disruption is over.
- More tokens are currently in free circulation on the platform, providing a chance for new investors and users to sign up.
- The platform will benefit from the incoming funds from the token unlock in the future.
- The platform has gained investor trust and transparency by successfully completing the token unlock procedure.
- With each token unlock, the platform solidifies its position as it moves closer to its maximum supply.
Why is Token Unlocking Important?
Token unlocks are significant events for a number of reasons, even though they momentarily disrupt supply and demand in the market.
1. Token Unlocks Are Critical Funding Tools
Token unlocks allow cryptocurrency initiatives to raise money for both short-term and long-term objectives.
Despite the fact that tokens generated in token unlocks are usually sold for a somewhat lower price, the vast quantities of tokens unlocked enable companies to generate significant revenue.
These monies enable the project to successfully supply goods and services to the cryptocurrency community while adhering to its developmental path.
2. Token Unlocks Help Reinstate Market Stability
Although it may seem paradoxical, token unlocks are crucial instruments for maintaining market stability. Imagine a cryptocurrency market where projects dump all of their token supply at once or, worse, in an unforeseen and random way.
Large-scale volatility and market disruption could result from this, leading to selling pressure, sharp price declines, a decline in investor confidence, and complete chaos.
Unlocks prevent token overselling and let market forces take control by introducing tokens gradually and methodically. Token unlocks play a crucial role in preserving market stability and are necessary tools for effective token management.
3. They Encourage User Participation on a Platform
When fresh tokens are made available for purchase on the open cryptocurrency market, this is known as a token unlock. This helps the project’s growth trajectory by enticing new investors or platform users to sign up and utilize its services.
Additionally, it guarantees that projects have an equal opportunity to thrive while maintaining their token worth and removing the possibility of short-term selling.
4. They Boost Transparency & Trust
Smart contracts created to carry out the conditions specified in the project agreement are used to automatically handle token unlocking. Without the need for human interaction, these smart contracts guarantee that tokens are issued at predetermined intervals or when specific requirements are fulfilled.
Token unlocking is, therefore, a crucial instrument for cryptocurrency projects to foster openness and confidence among investors and the broader cryptocurrency community.
5. Token Unlocks Are Changeable & Flexible
Token unlocks are adaptable events that a project’s founders or team can plan and reschedule. They can be designed to outperform a particular project performance benchmark, prevent bearish market runs, or respond to specific macroeconomic events.
Token unlocking’ flexibility makes it easier to plan token liquidity and prevent an oversupply or price fall.
6. Token Unlocks Prevent Dumping
Token unlocks ease into the maximum quantity of tokens in a specific project by releasing tokens progressively over time. This reduces the possibility of token overselling or dumping.
Since token unlocks are carefully thought out and prearranged events, the project team maintains control over the token unlock timetable to prevent token value instability.
Disadvantages of Token Unlocks
Token unlocks have some limitations, but they are greatly outweighed by their benefits. The following are a few possible drawbacks of token unlocks:
1. Token Unlocks Are Complex Events
Token unlocks are difficult to plan and carry out. Investors, team members, and other stakeholders are involved in token unlocks.
This intricate method of token unlocking avoids any administrative obstacles or security lapses, which could harm the token’s worth as well as the project’s credibility and reputation.
2. Token Unlocks Can Cause Regulatory Concerns
Depending on the project’s jurisdiction, locked tokens may occasionally come under regulatory investigation. Additionally, if the unlocking of a token creates a scenario in which the interests of the token receivers may not coincide with those of investors or the larger cryptocurrency community, regulatory bodies may step in.
3. Token Unlocks May Cause a Problem of Centralization
Due to their open, scalable, community-focused, and reliable structure, decentralized projects are the way of the future for cryptocurrency initiatives. Token unlocks have the potential to unfairly concentrate project control in the hands of a small number of firms in such a market setting.
4. Token Unlocks Are At The Mercy of Long-term Market Uncertainty
Since the cryptocurrency market is always changing and growing, it is unstable. Every project with a long-term token unlock schedule in this situation poses a risk of uncertainty.
In certain industries, like AI, gaming, meme currencies, payments, etc., the perception, demand, scope, and dynamics of initiatives might vary depending on industry churn. Future token unlocking is therefore always dependent on the mood of the market.
Difference Between Token Unlock and Vesting
Token unlocking and token vesting are not the same thing, despite their frequent interchangeability. Token unlocks, as previously mentioned, entail the release of previously locked tokens so they can be traded on the open market.
Vesting, on the other hand, entails the progressive distribution of tokens over a predetermined time period, usually to project founders or team members as an incentive. Typically, 10–20% of the total token supply set aside for the project team is vested.
Unlike investors, team members, founders, and advisors usually do not buy project tokens. Rather, a free allocation subject to a vesting schedule is given to them. The longest Cliff is frequently included in the team’s vesting schedule, motivating team members to perform at their highest level.
Team and advisor token vesting dates are frequently linked to the project’s accomplishment of particular objectives or benchmarks, like listing on a respectable exchange or hitting a user target. The tokens stay locked if these objectives are not fulfilled.
Token vesting can be viewed as an incentive scheme or a way to reward project participants for reaching a certain milestone or contributing to the team for a predetermined amount of time.
Token unlocking and vesting both contribute to the long-term growth of projects, but they differ in a number of ways.
Closing Remarks
Token unlocks have a measurable impact on strategy, mood, and market timing. These schedules can indicate volatility or opportunity for traders. They provide structure and accountability for builders. An unlock schedule’s design frequently shows how a project prioritizes long-term dedication over short-term profits. Markets react when tokens go from being locked to being circulated. Occasionally with a drop, occasionally with a shrug.
Clarity is important in any case. You may better understand market behavior and project planning by knowing how, when, and why tokens become available. It’s important to keep track of each planned release if you’re involved with a token, holding, building, or investing.
