Token Unlock in Crypto: Meaning, Impact, Advantages, Disadvantages and Much More

In the ever-evolving world of cryptocurrencies, there is an activity that brings tremendous churn, investor interest, and development potential—token unlocks.

Crypto projects outline detailed token information and dynamics in their whitepapers, including the maximum token supply and other pertinent details. However, these tokens are not issued all at once. A significant portion of the maximum token supply is initially locked and is gradually released into the open market in batches over time.

Releasing these locked tokens into the open crypto market is known as a token unlock. Token unlocks cause a significant shift in the circulating supply of tokens and raises important funding for the project to embark on its development roadmap.

But are token unlocks relevant to investors? Should investors be watchful of upcoming token unlocks? How does a token unlock impact the token's demand, price, and overall market sentiment towards the project?

In this blog, we shall examine the dynamics of token unlocks, their relevance to crypto projects, and the benefits they bring to investors, founders, and the crypto community at large.

What is Token Unlocking in Crypto?

A token unlock is an essential aspect of token management for a blockchain project or network. Token unlock is a process whereby previously locked tokens are moved into the private crypto wallets of initial investors, team members or partners and become freely tradable on the market. This token movement into the wallets of investors is typically done at a low price, ushering the unlocked tokens into the free-hand market dynamics of demand and supply to determine their real price in the market.

Token unlocks are typically undertaken in adherence to the project's fundraising round(s) or programs. Think of token unlocks as activities similar to public companies issuing new shares in the stock market.

Token unlocking increases the supply of tokens by a predetermined number. It is a carefully planned event to ensure the optimal release and delivery of tokens through merchants and avoid an oversupply situation, which could result in a price drop.

Several stakeholders, such as investors, platform users, project founders, and the crypto community, are involved in the token unlock and token distribution process.

Token unlocks may present a mixed bag of opportunities for investors. They can lead to high trading volumes, impact market dynamics, and introduce price volatility, resulting in considerable churn within the crypto market. Let's find out how token unlocks work and why they are relevant funding tools in the crypto space.

How Does Token Unlock Work?

Locked tokens are generally stored in smart contracts on the project's blockchain and released only when certain predefined conditions are met.

Token unlocks work by releasing a specified number of tokens at predetermined intervals or conditions. The particulars of these intervals or conditions are usually specified in a project's whitepaper.

Token unlocks are usually time-related to the project's token generation event (TGE). A TGE is when a blockchain-based business technically generates a new cryptocurrency token. This is typically followed by a public sale or initial coin offering (ICO). Subsequent to the TGE, token unlocks are planned for execution after a predetermined period of time.

The action of unlocking tokens is undertaken automatically through smart contracts, which are software programs that execute the terms of a project agreement. Smart contracts can release tokens when certain conditions are met or at predetermined time intervals.

Token unlocks increase the circulating supply of a token, causing a dilution in price as the demand-supply dynamics are temporarily disturbed. Token unlocks may also usher widespread overselling and a short-term bearish trend for the token. Despite these shortcomings, token unlocks are significant activities and important tools of funding in the roadmap of crypto projects.

Interestingly, Bitcoin already has approximately 94% of its total supply currently in circulation. BTC has a circulating supply of 19.75 million coins and a max supply of 21 million BTC. Hence, the addition of new mined Bitcoins to the cirluation have a limited to no impact on its price.

Similarly, PEPE has a total supply of 550 billion tokens, out of which 516 billion tokens, which is 93.81% of the total supply, are currently in circulation. The next unlock of 3.65 billion tokens on September 26, 2024 will have a limited impact on its price, as a majority of the total supply is already in circulation and a minor influx of tokens will not cause disequilibrum between supply and demand.

On the other hand, relatively newer crypto projects such as Optimism (OP), Dymension (DYM), Pyth Network (PYTH) have only 15-25% of their total supply currently in circulation, with a majority of their tokens yet to be infused into the open market for trading. Such a situation paves the way for high volatility as nearly 4 times more tokens than the current circulating supply is set to be ushered into the market.

This price volatility also has its upside as it offers attractive entry points for investors to buy these tokens and fuel their demand, thereby facilitating a price rise.

Types of Token Unlock: Cliff Unlock Vs. Linear Unlock

There are two types of token unlock: Cliff unlock and linear unlock.

The linear unlock is characterized by unlocking a certain number of tokens on a linear schedule over a defined period, such as monthly, biannually, yearly, biennially, etc. The linear token unlock method is known for minimizing the impact of token unlocks on the current market price of the token. It helps build investor confidence as it doesn't result in an oversold situation of tokens.

Solana (SOL) follows a linear unlock schedule of 66.54k SOL a day. The circulating supply of Solana (SOL) is 468.25 million, while its total supply is 584.61 million. Avalanche (AVAX) unlocks 9.5 million AVAX every three months, with a total supply of 720 million AVAX and a current circulating supply of 405.86 million AVAX.

The Cliff unlock method involves a period of no token releases followed by a lump sum of tokens being released on a specific date. The period of no token releases is called a 'cliff', followed by a sudden release of tokens into the market. Cliff unlock has certain limitations, including sudden price volatility, oversupply, changes in market sentiment and more. Arbitrum, Optimism, Sui and Aptos are some of the well-known crypto projects that use the cliff method for token unlocks.

The major upside of cliff token unlocks is that it ensures that stakeholders are committed to a project for a time period. What's more, the length of the cliff period can vary depending on the purpose of the allocation. For example, the cliff period for tokens given to investors and advisers may be longer than the cliff period for marketing and collaborations. This gives the project more flexibility to manage token liquidity and its overall circulating supply.

Impact of Token Unlock on Cryptocurrency

Token unlocks temporarily disrupt the market dynamics of supply and demand. Unlocks are known to create a bearish trend in the market as they represent an increase in circulating supply, thereby subduing the demand for the token and resulting in a price decline. An oversupply typically creates selling pressure among token holders.

However, aside from being a short-term circuit breaker in the market dynamics of a token, token unlocks have a much larger impact in the world of cryptocurrencies. In fact, token unlocks begin to show their effect even before the actual unlock takes place.

As the project is moving towards a token unlock, the price of the token may increase. This is purely due to the speculative nature of cryptocurrencies and is amplified by the fact that the project is closing in on another milestone or token unlock achievement.

Once the token unlock takes place, the price of the token may typically experience a drop for reasons including:

• Price drops as the supply of the token increases relative to its demand.
• Poor trading pairs on decentralized protocols for crypto exchange such as Uniswap.
• Large unlock volumes that disrupt free-hand market dynamics.
• Speculation and uncertainty in the market

Once the token ends this period of demand-supply disruption, token unlocks bring many benefits for the token and the platform at large.

• The platform now enjoys more tokens in free circulation, which is an opportunity for new investors/participants to join the platform.
• The inward funds from the token unlock are useful for the platform for its future development.
• The platform has successfully seen through the process of token unlock, garnering investor trust and transparency.
• The platform consolidates its position as it is inching towards its maximum supply with each token unlock.

Why is Token Unlocking Important?

Although token unlocks temporarily disturb natural market dynamics of demand and supply, they are important events for more reasons than one.

1. Token Unlocks Are Critical Funding Tools

It is through token unlocks that crypto projects can raise funds to meet their short-term goals and chart out the path to achieve their long-term goals. Although tokens issued in token unlocks are typically sold for a comparatively lower price, the large volumes of tokens unlocked help projects rake in substantial funds. These funds allow the project to act on its developmental roadmap and successfully deliver products and services to the crypto world.

2. Token Unlocks Help Reinstate Market Stability

This may sound counterintuitive, but token unlocks are actually important tools for market stability. Imagine a cryptocurrency market with projects dumping their total token supply in one single action or, worse, in an unplanned and haphazard manner. This can cause large-scale volatility and disrupt the entire market, giving rise to selling pressure, steep price drops, loss of investor confidence and total pandemonium.

Unlocks usher in tokens gradually and in a planned manner, avoiding the overselling of tokens and allowing market dynamics to take over. Token unlocks are essential tools for proper token management and are important in maintaining market stability.

3. They Encourage New Users/Participants on a Platform

Token unlocks involve the availability of new tokens for sale in the open crypto market. This encourages new investors or platform users to onboard themselves onto the platform and use its services, thereby helping the growth trajectory of the project. It also ensures that projects are given a fair chance to succeed while upholding their token value and eliminating chances of short-term selling.

4. They Boost Transparency & Trust

Token unlocking is managed automatically through smart contracts designed to execute the terms outlined in the project agreement. These smart contracts ensure that tokens are released at specified time intervals or when certain conditions are met without requiring any human intervention.

Thus, token unlocks are important tools for crypto projects to build trust and transparency among investors and the crypto community at large.

5. Token Unlocks Are Changeable & Flexible

Token unlocks are flexible events that can be scheduled and rescheduled by the founders/team behind a project. They can be tailored to cater to certain macroeconomic events, avoid bearish market runs, or supersede a certain project performance benchmark. This flexible nature of token unlocks helps better plan token liquidity and avoid a situation of oversupply or price crash.

6. Token Unlocks Prevent Dumping

By gradually incrementally releasing tokens over time, token unlocks ease into the maximum supply of tokens in a particular project. This minimizes the risk of dumping or overselling tokens. As token unlocks are well-planned and pre-scheduled events, the team behind the project exercises control over the token unlock schedule to avoid destabilizing the value of the token.

Disadvantages of Token Unlocking

Although the advantages of token unlock heavily outweigh the drawbacks, token unlocks have some disadvantages. Here are some of the potential downsides of token unlocks:

1. Token Unlocks Are Complex Events

Planning and executing token unlocks is no mean feat. Token unlocks involve several stakeholders, including investors, team members, and more. This complex process of token unlocking doesn't hit any administrative roadblocks or security breaches, as it can be detrimental to the token's value as well as the trust and reputation of the project.

2. Token Unlocks Can Cause Regulatory Concerns

In some cases, locked tokens may attract regulatory scrutiny, depending on the jurisdiction of the project. Also, regulatory bodies may intervene if a token's unlocking leads to a situation wherein the interests of the token recipients may not align with those of the investors or the broader crypto community.

3. Token Unlocks May Cause Problem of Centralization

Decentralized projects are the way forward for crypto projects due to their open, scalable, community-centric and trustable structure. In such a market scenario, token unlocks can tend to unfair concentration of control of a project in the hands of a few entities.

4. Token Unlocks Are At The Mercy of Long-term Market Uncertainty

The crypto market is volatile due to its constantly evolving and developing nature. In such a scenario, every project having a schedule of token unlocks running into the long term carries a risk of uncertainty. The perception, demand, scope and dynamics of projects can change based on the churn in the particular industry such as AI, gaming, meme coins, payments etc. Hence, token unlocks in the future are always at the mercy of market sentiment.

Difference between Token Unlock and Vesting

Often used interchangeably, token unlocks and token vesting are in fact different.

As discussed earlier, token unlocks involve a release of previously locked tokens that will become available for trading in the free market.

On the other hand, vesting involves the gradual distribution of tokens over a pre-decided period, typically to founders or team members of a project as a way to incentivize them. Vesting usually involves 10-20% of the total token supply that is reserved for the project's team.

Team members, founders and advisors typically do not purchase tokens of their project as investors do. Instead, they receive a free allocation that is subject to a vesting schedule. Often, the team vesting schedule features the longest Cliff aCliffe strictest terms, encouraging team members or founders to give their best to the project over a while.

Often, team and advisor token vesting schedules are tied to the project achieving specific goals or milestones, such as listing on a reputable exchange or reaching a user target. If these goals are not met, the tokens remain locked.

The vesting of tokens can be considered a system of incentivization or a reward mechanism for the members of the project for having achieved a particular milestone or being team contributors over a pre-specified period of time.

While both token unlocks and vesting help the long-term development of projects, they are different on several grounds.

Track Token Unlocks Today

Tracking token unlocks is important for seasoned investors, beginner investors and crypto market experts. Staying ahead of upcoming crypto token unlocks gives the entire crypto community visibility into the possible changes in market trends, volatility, prices of certain tokens and the imminent bullish/bearish trends for certain crypto niches.

As token unlocks alter the volumes and the price of tokens, investors must stay attuned to token unlock schedules to safeguard their interests.

Thankfully, several websites provide real-time insights into token unlock schedules, vesting schedules, and token unlocks across different crypto niches, offering data-driven tokenomics analysis and more.

Here is a list of websites that give you an insight into token unlocks today, upcoming token unlock schedules, vesting schedules and more:

https://token.unlocks.app/

https://cryptorank.io/token-unlock

https://messari.io/token-unlocks

https://tokentrack.co/

https://www.alchemy.com/alternatives/token-unlocks

https://coinmarketcap.com/token-unlocks/

https://dropstab.com/insights/vesting

https://www.cypherhunter.com/en/p/token-unlocks/

Some of the important token unlocks to watch out for in the fourth quarter of 2024 include Arbitrum (September), ApeCoin (September), Pixels (September), Avalanche (September), XDAO (October) and Celestia (November).

FAQs

What is Token Unlock?

Token unlock is a process that involves the movement of previously locked tokens of a crypto project to the private crypto wallets of investors. These investors typically include founders, team members, partners, etc. Once the tokens move into these private crypto wallets, they can be freely traded in crypto markets.

Token unlocks are significant activities in the development of a crypto project that affect market dynamics, token demand and supply, and the project's ability to proceed on its development roadmap. They are executed using smart contracts and typically follow a predetermined set of rules or requisitions.

Token unlocks may temporarily cause a bullish or bearish trend, depending on the demand for the token and the dynamics of the project in question.

Where can I track token unlocks today?

Crypto enthusiasts and investors can track token unlocks today and every day through websites such as:

https://token.unlocks.app/

https://cryptorank.io/token-unlock

https://messari.io/token-unlocks

https://tokentrack.co/

These websites offer comprehensive information on upcoming token unlock dates, token unlock schedules, token unlocks in DeFi, upcoming unlock events, insight into vested tokens and comprehensive token unlock information today and every day.

How does the token unlock affect the price?

There is no denying that token unlocks can lead to price fluctuations. Depending on the market's reaction to the unlock event, these fluctuations can result in either a bearish trend or a bullish upswing for the token's price.

Often, a token unlock generates selling pressure among investors due to a temporary oversupply of tokens, which can trigger a downward spiral in the token's price.

Sometimes, even the converse is true. A highly anticipated token unlock can cause a widespread spike in investor interest, leading to large-scale buying activity and a bullish price trend.

Is token unlocking good or bad?

Token unlocks are positive and significant activities that involve the availability of locked tokens for circulation in the crypto market.

Although token unlocks may cause short-term price volatility and selling pressure, token unlocks are positive activities for the long-term development and growth trajectory of crypto projects.

Token unlocks encourage new users/participants in a project, boost transparency and trust and help the project raise funds for its development roadmap. Hence, in the long term, token unlocks are good events that are beneficial to investors, miners, team members/founders or the project and the crypto community at large.

Is Token Unlock and Vesting the same?

No, token unlocks and vesting are not the same. Vesting involves the gradual distribution of tokens over a pre-decided period, typically to founders or team members of a project as a way to incentivize them.

Team members, founders and advisors typically do not purchase tokens of their project as investors do. On the other hand, token unlocks involve a release of previously locked tokens into the private crypto wallets of investors that will become available for trading in the free market