Why should investors understand vesting and cliff before analyzing a project?

Everyone involved in crypto investing will sooner or later face the question: why does the token price suddenly drop after a project launches? The answer is often hidden in the token unlock schedule. This is where two critical concepts come into play – vesting and cliff, which directly impact the stability of the project.

How does token unlocking work?

When a new project launches, there is a need for a fair distribution of tokens among developers, founders, early investors, and liquidity providers. Here, a dilemma arises: some participants are interested in long-term development, while others are only looking for quick profits. To balance these opposing interests, project teams implement a vesting system.

Vesting is a mechanism of gradually releasing tokens over a certain period. Instead of receiving all tokens at once, investors get them in parts over a predetermined timeframe.

What is a cliff and how does it affect the market?

Cliff (or waiting period) is a period during which tokens remain fully locked. After this period ends, gradual unlocking begins.

A classic example is the dYdX project. As of 12/01/2023, a cliff was set for a significant portion of tokens. At that moment, investors, team members, and partners gained access to their assets simultaneously. Such events create serious pressure on the price, as a large number of tokens could potentially flood the market.

Why is this mechanism needed?

Vesting protects the project from sharp market manipulations. Without such restrictions, founders or early investors could perform a Rug Pull attack – obtaining tokens during the ICO, immediately selling them, and disappearing, leaving other investors with nothing. Locking assets makes this impossible.

Main advantages of the mechanism

• Price stability: gradual token release prevents sudden dumps
• Decentralization: a longer distribution period means power is more evenly spread
• Team motivation: when tokens are unlocked slowly, participants are more motivated to work on the project
• Long-term loyalty: the mechanism shifts focus from short-term profit to comprehensive development

How does this help in project analysis?

Before investing, always check the vesting schedule. If a large portion of tokens will be unlocked in the coming months, it signals increased market pressure. Conversely, a long vesting period indicates more serious intentions from the team regarding the project’s development.