Many thanks to Karen Ubell of Goodwin Procter LLP for her legal expertise, and Will Reid of Pantera Capital for her analysis. Also thanks to Michael Dershewitz of Arca, Anil Lulla and Rob Sarrow of Delphi Digital for sharing their anonymous token unlocking 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.
Token lock-up is a fundamental 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 the token shares of its early investors.
According to previous analysis in the article on optimizing token allocation, by 2022, on average, about 15% of the total token supply will go to early supporters of builders in this field—a considerable 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 adjust incentives by locking Token after Token generation/distribution. Its lock-up range may be set between 0 and several years.
We are often asked by founders “how long should we set a lockup period” or we see founders set lockup periods that seem to be too long or too short to properly attract the right investors to put in their top investment .
Below we take a look at industry standards by examining how lock-up period settings are today and how they have changed over the past few years. 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
Agreements between investors and the founders of their investment projects have evolved over the years. During the 2017 cryptocurrency bull market, the SAFT (“Simple Agreement for Future Tokens”) framework created by Juan Benet, Marco Santori and Jesse Clayburgh was modeled after YC’s SAFE (“Simple Agreement for Future Equity”) and released as an open source document On the SAFT github. They were originally created to pre-sell ICOs at a discount below the public price, and were immediately popular; they were adopted by many early protocols, including Filecoin and Kik’s Kin.
Over time, however, Kik and other protocols have faced potential repercussions due to their IC0s allegedly violating securities laws, and SAFT has become obsolete. This was exacerbated when the 2017 bull market transformed into a prolonged bear market from 2018, and (non-crypto-native) investors – many of whom were carried away by the euphoria of the price increase – began to question Token value and shift towards equity. During the recent 2021 bull run, the spirit of SAFT made a comeback in the form of Token Warrants or Token Rights Agreements, but now they are usually attached to SAFE or equity investments. The biggest difference is that when SAFT is used in the current market, it is used for project Tokens that are more clear on Token and protocol functions, development and release plans, and Token release timelines, rather than any possibility that the company may issue in the future (no code yet) ), while Token Warrants and Protocols are often used to create value consistency between investors and founders in the latter case.
Token unlock trend unlock type
Unlock schedules can be divided into two distinct themes: time-based and trigger-based.
Time-based vests (including cliffs) start on some agreed date, either on the day the agreement is enforced or for a period of time after the agreement is enforced. Trigger-based unlocking schedules start after certain events. Usually this involves a token generation event, but it could also involve a mainnet launch or the listing of a project’s token on a well-known exchange. We found that approximately 70% of token unlocking programs are trigger-based, and 65% of them start after a token generation event.
Time-based unlocking (including lock-up periods) begins on an agreed date, either on the date the agreement is signed, or some time after the agreement is signed. After certain events, trigger-based unlock schedules are initiated. Typically, this involves a token generation event, but may also involve a mainnet launch or the point in time when a project’s token is listed on a mainstream exchange. We found that approximately 70% of token unlocking programs are trigger-based, and 65% of them start after a token generation event.
Total unlock time
Unfortunately, data for this period is lacking as not many transactions were completed/recorded during 2019, which coincidentally is the year we are starting to see more regulatory oversight. After 2020, as investors and founders bounce back from the initial regulatory panic, and founders begin to gain leverage ahead of the 2021 bull run, we start to see shorter lock-up periods and longer overall unlock times.
The total lock-up period has been increasing
Unlock times in the analysis cases vary 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 most (over a third) are unlocked on a monthly basis.
The lock-up period is the period of time before any tokens are allocated. Cliff lengths in crypto can range from 0 to over a year.
Length of lock-up period over time
Although the data is not reflected in the graph above, a one-year lock-up period was common in the 2018 case; terms at the time were usually set verbally or simply by a handshake, with no formal record. One-year lockup periods are popular for two reasons:
·Section 144 of the Securities Act
Section 144 of the Securities Act, the most common “safe harbor” exemption, allows investors to resell unregistered securities without the resale being deemed a distribution on behalf of the original issuer and the investor being deemed liable Statutory underwriter securities laws, provided, of course, certain conditions are met. One of the conditions preventing a resale from being considered a distribution is that the investor must hold the securities for at least one year prior to any resale. While it does not necessarily affect the lock-up period itself, the one-year holding period helps issuers and dealers comply with securities laws in case the token is considered a security in the future.
· Influenced by the SEC’s prosecution of the Telegram founder
The SEC incident against Telegram has led founders to invest more time and development into building their protocol, paying attention to increasing adoption by end users, developers and validators, and increasing secondary liquidity outside of investors themselves.
Unfortunately, there is no conclusive data on whether unlocked and/or unlocked tokens can be staked. This is usually not written directly into the contract, but some protocols do allow staking unlocked tokens.
Is there an optimal unlock mode?
Over time, the unlocking model is also changing, and founders and investors will ask, “Which token lock-up structure is the best?”
The “optimal” we define here means that the token volatility during the unlocking period is the least and the unlocking day has the least negative impact on the token price. Of course, there are other factors that may affect these, including: development milestones, decentralization of power achieved, and regulatory factors (which may cause the unlocking conditions in the United States to be somewhat different).
We tested a few projects to test comparative assumptions about linear unlocking (partial unlocking at the beginning, and then progressively unlocking over time) versus date-specific unlocking (token unlocking based on a specific date):
Comparing linear unlocks and specific date unlocks:
Assumption A: The volatility of linear unlocking during the unlocking period is higher than that of unlocking on a specific date;
Assumption B: unlocking on a specific date has a more serious impact on the token price when unlocking than linear unlocking.
Specific date unlock comparison:
Assumption C: Due to the expectation of potential token dumping, the higher the unlocking ratio, the smaller the impact on the token price;
Hypothesis D: Items that unlock more (and thus fewer total unlock days) per epoch experience better maximum drawdowns than those that unlock fewer but more total unlock days;
Assumption E: Projects with a longer total lock-up period will be more severely affected by the price of Tokens than projects with a shorter total lock-up period.
conclusion as below:
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 unlock, 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 the token.
4. The volatility of linear unlocking during the unlocking period is lower than that of unlocking on a specific date.
5. Linear unlocks have a better impact on price after the initial unlock event than date-specific unlocks.
Based on this, we recommend that founders consider specific date unlocking rather than linear unlocking, and hope that founders will consider their unlocking schedule based on the above conclusions.
Note: This recommendation only considers market impact and protection against volatility, but there may be other important regulatory factors such as the Telegram case and the possible benefits of complying with the Rule 144 Safe Harbor framework.
We analyze it from a risk management perspective, 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 unlock period and subtracted the BGCI’s daily return multiplied by the Token Beta value from our Token return to adapt to different market conditions (in other words, we normalized the Token alpha value ).
where ra is the normalized daily log return of Token a, r BGCI is the daily log return of BGCI, and a is the beta of asset a relative to BGCI.
Tokens are first divided into linear and specific date unlocks, and then we evaluate the normalized volatility of tokens throughout the unlocking period. This is to evaluate the assumption that linear unlocking may lead to more sustained fluctuations in Token over time (Assumption A).
Our results, ceteris paribus, show that linear unlocks have no significant long-term volatility effects compared to date-specific unlocks; in fact, linear unlocks are less volatile than date-specific unlocks. Furthermore, we confirm our hypothesis that linear unlocking has a smaller impact on the return of the initial unlocking event than a specific day unlocking (hypothesis B).
Linear unlocks have less impact on returns from initial unlock events compared to specific date unlocks
Next, we compared specific date unlocks. First, we evaluated the impact of lock-up period length and initial unlock volume on the day, after, and one week after the initial unlock event. Our results show that a 6-month lock-up period is better than a 1-year or no lock-up period, and somewhat counterintuitively, it is better to unlock a higher percentage of tokens after the lock-up period ends (assuming C). To explain this, we assume that projects with smaller unlocking volumes have some awareness of the possible “dumping” behavior of their early investors, and hope to minimize selling pressure by unlocking fewer tokens.
Finally, we study the effect 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, day after, and week after the unlock event.
Our results show that if the goal is to minimize the impact of unlocking events on the price, the unlocking interval is longer (up to 6 months), the amount of unlocking per cycle is larger (although the signal is less clear) and shorter The total unlock period of is suitable (assuming D and E).
By mid-2022, the decline in investor leverage and enthusiasm for fund investment caused by the crypto bear market will allow investors to invest in projects at lower prices and have a greater say in lock-up terms. In addition, the regulatory environment has become 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.
We recommend that any founders reading this article discuss their token unlocking timeline with their investors and industry experts, and consider other token economics not covered in this article. Our analysis has some initial directional indications of the return impact of different unlocking schedules and shows that linear unlocking is better than date-specific unlocking if the goal is to minimize selling pressure and reduce token volatility during unlocking after the lock-up period ends. In addition, we recommend that all founders reading this article consult legal counsel to discuss regulation and investor protection, such as the Telegram case, the factors outlined in the SEC guidance, and the potential benefits to issuers and investors of compliance with the Rule 144 safe harbor. These may require longer lock-up periods and longer unlock periods for longer-term development and decentralization.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/find-the-optimal-solution-for-token-unlocking/
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