A token lockup is an act of prohibiting the sale of a certain token by early investors for a set period of time. To put it another way, token holders will be unable to sell their assets until the lockup period expires.
Lockup periods, also known as vesting periods, are critical in preserving a project’s token price, particularly following a token sale event. Several blockchain projects provide their native currency as an incentive to angel investors, project developers, and team members in the early phases, with the goal of generating funds following a fundraising event such as an ICO (Initial Coin Offering) or IEO (Initial Exchange Offering).
These incentives might be substantial enough to devalue the token if all existing holders began selling their tokens following the token sale event. Cryptocurrency start-ups may strictly monitor token supply and avoid significant drops in the value of their native currency by instituting a lockup period.
Token Lockups are Necessary
Executing significant sell-offs in a short amount of time following its introduction might look like a lack of faith by people closest to the project in its ability to deliver on its promises. This frequently results in a flurry of speculative news from network participants and media sources, followed by a rapid decline of events before the project can begin properly. A lockup time helps to avoid this and ensures that team members and developers are long-term involvement in the project.
Additionally, blockchain projects frequently issue vesting periods at each step of token distribution, with vesting times ranging from 6 to 15 months after launch. Because these locked-up tokens are not part of the active market, they are not taken into account for calculating the cryptocurrency’s circulating supply.
