Token lockup refers to a time period during which cryptocurrency tokens cannot be exchanged or traded.
What Is a Token Lockup?
Token lock-up (or vesting period) is a time span, generally following a token sale, during which token holders of a cryptocurrency project are not permitted to sell their tokens. The lock-up period assists initiatives in avoiding liquidity issues while new projects are still building their supporting base.
For example, the FLOW token generated 1.25 billion FLOW during its token production and distribution stage. The tokens were locked up for about a year, meanwhile, the tokens retained their value and the network remained functional. With the token generation, the lock-up period and transfer limitations were set, ensuring that pre-launch investors, team members, and community members are all on an equal footing.
With the help of lock-up periods, the project earns more money because of both the demand and the value of the token rise. However, the main reason for instituting a lock-up period is that it protects the market from being bombarded with excessive tokens which in turn lowers the value of the token due to increased sales.
The DeFi sector is now facing two major challenges: protecting investors from fraudulent projects and allowing project creators to lock their tokens and secure the confidence of their community. With a rising number of rug pulls and crypto scams in the DeFi market, investors are asking developers to lock their liquidity and limit the risk of founder fraud.
Developers arrange smart contracts and deposit a particular quantity of tokens in a cold wallet, locking it for a specified length of time, say eight months. The creators construct a public profile of the token lock-up for their community. This instills confidence in the project and the team since it keeps them motivated to focus on long-term development rather than the market price of their coin. Additionally, it also boosts the confidence of the public supporting the project.
To ensure a healthy network and ecosystem, project developers must tightly maintain token lockup requirements for the team and advisors, private sale participants, and public sale (IEO) participants. One of the price stability techniques is the locking up of tokens. Tokens that have been locked up are not part of the circulating supply. These are designed to terminate withdrawals after a cryptocurrency’s debut, so no team members or investors will be able to acquire their tokens until the lockup period expires. This encourages the crew to concentrate on the product rather than selling their stakes immediately after launch.
Large sell-offs are typical following initial coin offerings (ICO), in which initial investors or the project’s founders sell their holdings immediately after the cryptocurrency reaches the market, resulting in massive price decreases. To prevent this from occurring, token lockups are implemented, and they provide further trust to potential token sale participants.
Because the locked-up tokens are not part of the circulating supply, they are not taken into account in a technical analysis done by investors and traders.
