A token lock-up refers to the act of restricting the sale of a particular token by early investors for a pre-defined period of time. In other words, token holders will not be able to sell their assets until the lock-up period is elapsed.
Sometimes referred to as vesting periods, lock-up periods play a crucial role in maintaining a project’s token price, especially after a token sale event.
Preventing Price Crashes
Many blockchain projects issue their native currency to angel investors, project developers and team members during the early stages as incentives with the hope to raise capital after a fundraising event like an ICO (Initial Coin Offering) or IEO (Initial Exchange Offering).
These incentives could be quite sizeable, enough to topple the token’s value if all existing holders began selling their tokens after the token sale event. By setting a lockup period, cryptocurrency start-ups can closely manage token supply and avoid drastic downward swings in the value of their native currency.
Also, executing considerably considerable sell-offs in a short time period after its launch can appear as a lack of confidence by those closest to the project to deliver on its promises. This commonly leads to a wide range of speculative news by network participants and media outlets, followed by a quick downturn of events before the project kicks off properly. A lock-up period helps avoid this and ensure team members and developers are invested in the project long-term.
Furthermore, blockchain projects commonly issue vesting periods at each stage of token distribution, generally a time frame between 6 to 15 months after launch. These locked-up tokens are not a part of the active market; hence, they are not considered when estimating the cryptocurrency’s circulating supply.