Amidst the ongoing shaky cryptocurrency market, crypto holders are scrutinizing every metric to determine whether or not their holdings will appreciate.

One such metric is known as token unlock, which affects the circulating supply of a cryptocurrency. But what exactly are token unlocking and do they affect the prices of cryptocurrencies? Let’s find out.

Defining token unlocks

When a new cryptocurrency project is launched in the market, not all tokens are issued to the public. Instead, a percentage of the coin's maximum supply may be assigned to project owners and developers, or it could simply be held in a smart contract for a future date.

Such tokens are kept ‘locked’ for a specific time period, known as the ‘vesting period’. In other words, tokens under the vesting period are inaccessible to anyone, meaning they cannot be bought, sold, or traded in the open market.

When the vesting period ends, the tokens can be accessed by those to whom they were initially assigned. This period is referred to as token unlocks. For instance, the founders of the development team of a project can only interact with their newly launched project’s tokens once the vesting period ends.

As the name suggests, token unlocks allow one to interact with previously ‘locked’ tokens. Separately, token lockups may not necessarily occur only before an initial coin offering. They can also take place during airdrops or a sale event during a specific time period.

Why are tokens locked in the first place?

In short, it stabilizes cryptocurrency prices because some early backers or project team members might sell their tokens as soon as they are available. If this happens, the newly launched cryptocurrency's price can collapse due to an increase in supply on the market.

Additionally, the locked tokens encourage developers to continue working towards the projects' long-term goals without worrying about the value of their tokens on the market. Because developers wouldn't have access to their funds, the same could even prevent cases of rug pulls.

Where are these tokens locked?

Locked tokens are typically stored in smart contracts and only released when specific requirements are satisfied. For instance, a project might elect to distribute 20 percent of its maximum supply right away upon sale and the remaining 80 percent over the course of two years.

Another scenario is the locking of some tokens until the achievement of a specific objective, such as the launch of the main net.

Meanwhile, smart contracts hold locked tokens in a designated address before they are released. During token unlocks, smart contracts generate and distribute the corresponding number of tokens to the investor's wallet.

Also Read:Five worst cryptocurrency rug pulls scams in history

What happens once tokens are unlocked?

As mentioned earlier, token unlock events increase the circulating supply of a cryptocurrency project. A quick note here is that locked tokens are not considered a part of the circulating supply but rather come under maximum supply.

Considering supply and demand dynamics, you might be wondering if an increase in supply would result in a decrease in the value of a specific cryptocurrency. However, that is not necessarily the case and the same depends on several factors.

Sometimes, the demand for a particular token is so high that they get gobbled up by buyers during token unlock periods. This is particularly evident during bull markets, where cryptocurrency prices are driven by a constant surge in demand.

A bear market scenario, however, can reduce a cryptocurrency's value during token unlocks. Before tokens are unlocked, investors might short the currency because a combination of increased supply and weak demand would result in a price drop.

Alternatively, a cryptocurrency’s price might not be affected during token unlocks if the number of coins set to be released is not large enough to disrupt the project’s circulating supply.

Also Read:Here are some common mistakes cryptocurrency startups should avoid

How do you know when a token gets unlocks?

There are a few different ways to learn about token unlocks for a cryptocurrency project. The first approach involves looking for new advancements on the project's website. In some situations, roadmaps may even contain details concerning token unlocks.

A more comprehensive method is to scan through the project’s whitepaper. This would give you a more detailed overview of the number of tokens that will be unlocked and at which date.

Meanwhile, visit websites of data aggregators like CryptoRank to find out which projects are planning token unlock events if you want to go about it more quickly.

(Edited by : Sangam Singh)

First Published:May 30, 2023 7:56 PM IST