3 | Token distribution and vesting

When examining a project’s tokenomics, it is essential to look at how tokens are distributed. There are generally two ways to launch and distribute tokens: a fair launch and a pre-mining launch. A fair launch is when there is no early access or private allocations before a token is minted and distributed to the public. On the other hand, pre-mining allows a portion of the crypto to be minted and distributed to a select group before being offered to the public.

Generally speaking, investors will pay attention to how evenly a token is distributed with the idea that a large number of tokens held by a few organizations or holders is riskier. You can get an idea of the holders of a token by checking a project’s website and whitepaper. You can find the list of announced venture capital firms of the project and also examine the spread between seed, private, and public token offerings to get an idea of the distribution of the token. How much of the token supply is held by the team and who are the project’s advisors?

Investors observe the vesting schedules of a token to determine the pace with which new tokens will hit the open market. Most pre-mine tokens will have various vesting schedules for each category of their token distribution. Seed, private, and public rounds will typically unlock at varying paces usually with cheaper token prices having longer vesting periods. Team, advisor, staking, marketing, and ecosystem development categories (not limited to these) will all have varying vesting schedules in their tokenomics as well. Finely-tuned tokenomics will provide a smooth emissions curve without any periodic dumps of a large sums of tokens on the market.

Typically a project will provide a certain percentage of the token’s supply at the token generation event (TGE) or market listing and then release the rest of the supply over time. However, you may notice that some projects institute cliffs or locks on certain categories of tokens. Investors will look at these cliffs as an indication for how long the team and the institutional investors are committed to seeing the project become a success.

In the next lesson we will explore the various measures of token supply and market capitalization.

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