Find the optimal solution for Token unlocking

Original title: "The Optimal Token Vesting Schedule"

Original author: Lauren Stephanian

Original compilation: 0x711 & czgsws, BlockBeats< /blockquote>

Thanks to Karen Ubell of Goodwin Procter LLP for legal expertise and Will Reid of Pantera Capital for contributions analysis. Also thanks to Michael Dershewitz from Arca, Anil Lulla and Rob Sarrow from Delphi Digital for sharing their anonymous token unlock data with me. Finally, thanks to Soona Amhaz of Volt Capital and William Fan, Joey Krug, Kyle Canchola, and Ryan Barney of Pantera for their suggestions and comments.

Introduction

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Token lockup is a basic part of crypto venture capital. In fact, in today’s market, it’s hard to find an early-stage crypto company that doesn’t lock up its early investors’ token shares.

According to the previous analysis in the article on optimizing Token allocation, it shows that by 2022, there 15% of the total token supply went to the early backers of the builders in the space - a pretty big share. But through what mechanism are these Tokens distributed to investors?

The liquidity of Token is significantly higher than that of traditional equity, so founders tend to generate / After distribution, lock the Token to adjust the incentives. Its lockup range may be set between 0 and several years.

We are often asked by the founders "how long should the lock-up time be set", Or we’ve seen founders set lock-up periods that seem too long or too short to properly attract the right investors to put in their top dollar.

Review industry standards for changes in To do this, we analyzed more than 150 pieces of data from 3 funds including Arca, Delphi Digital and Pantera Capital.

Market cycles and financing terms

Over the years, the agreement between investors and the founders of the projects in which they invest has evolved. In the cryptocurrency bull market of 2017, the SAFT ("Simple Agreement for Future Token") framework created by Juan Benet, Marco Santori, and Jesse Clayburgh was modeled on YC's SAFE ("Simple Agreement for Future Equity") and released as an open source file on the SAFT github. They were originally created to pre-sell ICOs at a discount to the public price and were immediately popular; they were adopted by many early protocols, including Filecoin and Kik’s Kin.

However, over time, Kik and other protocols have allegedly violated securities laws due to their ICOs and face the potential fallout, and the SAFT is outdated. This was exacerbated when the 2017 bull market turned into a prolonged bear market that began in 2018, and (non-crypto-native) investors—many of whom were carried away by the excitement of rising prices—began to question token value and shifted towards equity. In the recent 2021 bull market, the SAFT ethos made a comeback in the form of Token Warrants or Token Rights Agreements, but now they are usually attached to SAFEs or equity investments. The biggest difference is that when SAFT is used in the current market, it is used for a clearer project Token on Token and protocol functions, development and release plans, and Token release timeline, rather than any possibility that the company may issue in the future (there is no code yet) ), while Token warrants and agreements are often used to create value alignment between investors and founders in the latter case.

Token Unlock Trend Unlock Type

Unlock schedules can be broken down into two distinct topics: time-based and trigger-based.

Time-based unlocking (including the lock-up period) begins on an agreed date, either on the date the agreement is signed or a period after the agreement is signed time. After certain events, a trigger-based unlock schedule starts. Typically, this involves a token generation event, but it could also involve the mainnet launch or the point at which a project token is listed on a major exchange. We found that about 70% of token unlocking schedules are trigger-based, with 65% of them starting after a token generation event.

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Total unlock duration

Unfortunately, due to the Not many deals were completed/recorded during 2009, so data is lacking for this period, which is coincidentally the year we start to see more regulatory oversight. After 2020, we start to see shorter lock-up periods and longer overall unlock times as investors and founders bounce back from the initial regulatory scare, and founders start to gain leverage ahead of the 2021 bull run.

The total lock-up period has been increasing

Unlock Time

The unlocking times in the analyzed cases ranged from a single block to monthly, quarterly to semi-annual. Some of these transactions are unlocked block by block, which is a recent trend, but the majority (over a third) are unlocked on a monthly basis.

Lockup Period

The lock-up period is a period of time before any Token is allocated. Cliff lengths in crypto can range from 0 to over a year.

The length of the lock-up period over time

Although the data is not reflected in the graph above, in the case of 2018, One-year lock-up periods were common; terms at the time were often verbal or merely a handshake, with no formal record. The one-year lock-up period is popular for two reasons:

· Securities Law Section 144

Section 144 of the Securities Act, the most common "safe harbor" exemption, allows investors to resell unregistered securities where the resale Rather than being deemed to make distributions on behalf of the original issuer, the investor is considered a statutory underwriter subject to liability under securities law, provided of course that certain conditions are met. One of the conditions that prevents a resale from being considered a distribution is that investors must hold the securities for at least one year prior to any resale. While it doesn't necessarily affect the lockup period itself, the one-year holding period helps issuers and dealers comply with securities laws in case the token is deemed a security in the future.

· Affected by SEC’s prosecution of the founder of Telegram

The SEC incident against Telegram caused the founders to devote more time and development to building their protocol, paying attention to increasing adoption by end users, developers and validators, and increasing investment beyond investors themselves secondary liquidity.

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Staking

Unfortunately, there is no conclusive data on whether unlocked and/or unlocked tokens can be staked. This is usually not directly written into the contract, but some protocols do allow unlocked tokens to be staked.

Is there an optimal What about unlocked mode?

With the passage of time, the unlocking mode is also changing, and the founders and investors will ask, "Which Token lock-up structure is the best?"

The "optimum" we define here means: the Token volatility during the unlocking period is the least and the negative impact of the unlocking date on the Token price is the least. Of course, there may be other factors that affect these, including: development milestones, the achievement of decentralization, and regulatory factors (which may cause the unlocking conditions in the United States to be somewhat different).

We ran tests on some projects to examine the relationship between linear unlocking (unlocking a portion at the beginning and gradually unlocking over time) and date-specific unlocking Token unlocking on different dates) comparison assumptions:

Comparison of linear unlocking and specific date unlocking:

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Assumption A: The volatility of linear unlocking during unlocking is higher than that of unlocking on a specific date;

Assumption B: Unlocking on a specific date will affect Token when unlocking The impact of price is more serious than linear unlocking.

Specific date unlock comparison:

Assumption C: Due to the expectation of potential Token dumping, The higher the unlock ratio, the smaller the impact on the Token price;

Assumption D: Items with more unlocks per period (thus fewer total unlock days) are less than unlocked but more total unlock days projects will experience a better maximum retracement;

Assumption E: Projects with a longer total lock-up period will be more severely affected by the price of Token than projects with a shorter total lock-up period.

The conclusion is as follows:

1. For unlocking on a specific date, a 6-month lock-up period is better than a 1-year or no lock-up period.

2. The larger the initial unlocking, the smaller the negative impact on the Token price.

3. The longer the unlocking interval (up to 6 months), the greater the unlocking amount, and the shorter the total locking period, the higher the "worst return" of Token.

4. The volatility of linear unlocking during the unlocking period is lower than specific date unlocking.

5. Linear unlocks have a better impact on price after the initial unlock event than specific date unlocks.

Based on this, we recommend that founders consider specific date unlocking instead of linear unlocking, and hope that founders People consider their unlocking schedule based on the above conclusions.

Note: This advice only considers market impact and protection against volatility, but there may be other important regulatory factors such as the Telegram case and compliance with the Rule 144 safe harbor framework may benefits.

We analyze from the perspective of risk management, looking for the largest drawdown rather than the largest positive return. We normalized the data using the daily returns of the Bloomberg Galaxy Crypto Index (BGCI) as the index. We calculated the token beta value during the unlocking period and subtracted BGCI's daily return multiplied by the token beta value from our token return to adjust for different market conditions (in other words, we normalized the token alpha value ).

where r a is the standardized daily logarithmic return of Token a, r BGCI is the daily logarithmic return of BGCI, and a is the beta of asset a relative to BGCI.

Token is first divided into linear and specific date unlocking, and then we evaluate the Token's overall unlocking period Normalized volatility within . This is to evaluate the assumption that linear unlocking may lead to more continuous volatility of tokens over time (Assumption A).

our The results, ceteris paribus, show that linear unlocking has no appreciable long-run volatility effect compared to date-specific unlocking; in fact, linear unlocking is less volatile than date-specific unlocking. Furthermore, we confirm our hypothesis that linear unlocking has a smaller impact on returns to initial unlocking events than specific date unlocking (Hypothesis B).

Compared with specific date unlocking, linear unlocking is better for initial unlocking Event returns have less impact

Next, we compared specific date unlocks. First, we evaluated the impact of the length of the lockup period and the initial unlocked amount on the day of, after, and a week after the initial unlock event. Our results show that a 6-month lockup period is better than a 1-year or no lockup period, and somewhat counterintuitively, it is better to unlock a higher percentage of tokens after the lockup period ends (Assumption C). To explain this, we assume that projects with smaller unlocked volumes have some awareness of possible “dumping” by their early investors and hope to minimize selling pressure by unlocking fewer tokens.

Finally, We studied the impact of the number of unlocks per unlock date, the interval between unlock days, and the total lock period on the token price after the initial unlock. To do this, we looked at each unlock event after the initial unlock and recorded the worst daily normalized return on the day of the unlock event, the day after, and the week following.

Our results show that if the goal is to minimize the impact of unlock events on price, longer unlock intervals (up to 6 months), each A larger unlock amount of the period (although the signal is less clear) and a shorter total unlock period are desirable (Assumptions D and E).

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Conclusion

As of the middle of 2022, investors’ leverage ratio and fund investment enthusiasm caused by crypto bear market will decrease, making investment Investors can invest in projects at a lower price and have greater say in the lock-up terms. In addition, the regulatory environment is becoming stricter, and there may be a one-year or even longer lock-up period in the future, which will also increase the uncertainty of project parties and investors in the future disposal of encrypted assets.

< p>We recommend that any founders reading this article discuss their token unlock timeline with their investors and industry experts, and consider other token economics not covered in this article. Our analysis has some preliminary directional indications on the return impact of different unlocking schedules, and suggests that linear unlocking is better than date-specific unlocking if the goal is to minimize sell pressure after the lockup period ends and reduce token volatility during unlocking. In addition, we recommend that all founders reading this article consult legal counsel to discuss regulation and investor protections such as the Telegram case, the factors outlined in the SEC guidance, and the possible benefits to issuers and investors of complying with the Rule 144 safe harbor. These may require a longer lock-up period and a longer unlock period to achieve longer-term development and decentralization.

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