When it comes to cryptocurrencies, many of the concepts used come from traditional finance. And token locking is no different. In a general sense, locking tokens is performed exactly as it sounds. Tokens are “locked” so the token holders cannot sell their tokens right away. Once a specific period of time passes, you can trade and transact these tokens as normal. These lockups are critical to maintaining long-term value for an asset. It can also prevent a whale from selling all of their tokens in one go, which could be devastating for the token price.
And most importantly, it can help develop lasting connections within a team. Time-releasing tokens is a great way to ensure that a team will remain on a new project and help it to grow. In turn, this provides confidence for potential stakeholders to invest in new cryptocurrencies.
Why is Token Locking Implemented?
Creators of new cryptocurrencies release tokens to the public via a crowdfunding event. The more you donate, the more tokens you receive. But it is common for early investors to sell off these tokens right after the Initial Coin Offering (ICO). This causes a huge drop in price and damages the market. To prevent this, developers use token locking to ensure a healthy ecosystem. They arrange smart contracts and a certain percentage of tokens will remain in a cold wallet. These tokens are not part of the circulating supply. They will only be released over a certain time period, typically one or two years. These vested tokens are a great incentive for partners, team members, and other contributors to stick around. Receiving rewards slowly over time ensures members remain patient. They are more likely to continue developing a project and building a prosperous community.
Token Locking vs Liquidity Locking
Blockchains like Binance Smart Chain and Ethereum create new tokens daily. And when trading these tokens, time is essential. If execution is slow, you might find that the expected price and the executed price are vastly different. Liquidity pools store cryptocurrencies in a smart contract to provide faster transactions. Think of it as providing several counters to serve customers instead of a single one. Investors in cryptocurrencies often request developers to lock liquidity pools. This helps prevent a “rug-pull” where unscrupulous developers flee with liquidity funds. For example, a developer could sell a large number of new tokens and withdraw stablecoin from a liquidity pool. Liquidity locking helps avoid this problem. Token locking is similar but has a different purpose. A percentage of the pre-mined tokens are locked away and cannot be accessed until the set time period expires.
Why Token Locking is a Great Idea
The concept of token locking or vesting cryptocurrencies is fundamental to stability. There are so many benefits that arise from locking tokens. Firstly, it is a great way for a startup to show confidence in its project. Team members have an incentive to stay with the company, creating better products. This creates a viable ecosystem where investors will have more faith in the startup. And this also removes the massive sell-offs that typically follow ICOs. This affords private and public investors protection against price volatility. And adding too many tokens all at once can lead to market saturation and a loss in value. By reducing the number of tokens in circulation, the price of tokens may increase. That gives token owners a greater possibility of turning a profit when the lock period expires.