Understanding how all elements of crypto markets work is key to success in this volatile industry. In this guide, we explain what you need to know about token unlocks and how to use this information to invest properly. Let’s get started.
KEY TAKEAWAYS
➤ Token unlocks release previously locked tokens into the market and are crucial for managing liquidity, investor relations, and regulatory compliance.
➤ Poorly structured token unlocks can negatively impact prices by causing sell-offs, while well-planned unlocks can maintain stability.
➤ Regulatory compliance is essential for token unlocks, as improper execution can lead to classification as unregistered securities.
What are token unlocks?
Token unlocks are events in crypto where locked coins or tokens are released and become available for trading in the open market. These tokens are typically held by initial investors, team members, or partners of a crypto project and are released according to a predetermined schedule or set of conditions.
Token unlocks are a crucial part of the investment cycle, and knowing how they work can help you level up your trading game.
How do token unlocks work?
When properly implemented, a token unlock can manage liquidity, investor relations, regulatory compliance, and a project’s long-term sustainability.
Token distribution
Knowing a token’s distribution will help you understand the investment cycle, the different participants involved in the fundraising process, and why founders lock tokens.
1. Team allocations
Founders and the core team usually receive a portion of the total crypto supply. These tokens are subject to vesting schedules and unlocks over time.
Vesting is a process that dictates when investors and team members receive their allocated tokens over time.
For example, a founder may receive 10% of the total supply but with a four-year vesting schedule and a one-year cliff. This means that no tokens are available in the first year (cliff period). After one year, 25% unlocks, and the rest unlocks monthly or quarterly over three more years.
This scenario prevents founders from dumping tokens immediately (bad optics and market impact). It signals commitment to investors and the community and aligns long-term incentives with project success.
2. Investors and private sales
When a project raises funds through token sales, early investors will often get tokens at a discount. These investors typically must agree to gradual unlocking schedules to prevent mass sell-offs that could affect the token price. There are many types of investors involved in the fundraising process:
| Investors | Description | Vesting period |
|---|---|---|
| Seed | These are the earliest backers that provide capital to help the project develop an initial concept or minimum viable product (MVP). | 2-4 years |
| Strategic (VC/angel) | These investors bring more than just capital — they provide strategic value (e.g., networking, advisory, marketing, or partnerships). | 1-3 years |
| Private sale | These investors participate in token sales, which occur before a project is fully launched but are often subject to vesting periods. | 6 months-1 year |
This separation of investors creates a controlled liquidity flow, supporting token price stability. It also encourages investors to contribute beyond just buying low and selling high.
3. Treasury and ecosystem funds
Founders may manage a treasury fund. This fund includes tokens allocated for ecosystem growth, partnerships, grants, and research and development. Unlocking these tokens over time ensures ongoing project funding instead of capital being burned through too quickly.
The aforementioned token allocations are not limited to venture capital and investing. There are more categories (e.g., LP rewards, staking, etc.) depending on the project. However, these distributions are most relevant to this token unlock-specific guide.
Regulations
Perhaps the most important aspect of token unlocks is that they allow projects to comply with regulations (e.g., securities laws). Token unlock schedules help avoid a security token classification.
By ensuring tokens are used for utility (staking, governance, transactions), tokens are distributed gradually to prevent speculative trading concerns and are not concentrated in the hands of a few individuals. To accomplish this, founders will often:
- Set up a foundation or decentralized autonomous organization (DAO) to manage token unlocks instead of direct founder control.
- Structure these events so that no single entity can manipulate the market.
- Work with legal advisors to structure compliant token sales.
If a token launch is not strategic, it could be classified as a security. Operating an unregistered security could result in legal penalties. A proper token unlock strategy can help avoid regulatory risks, ensure healthy tokenomics, and prevent sudden sell-offs, which could lead to regulatory violations.
Token unlock execution
Founders plan token unlock schedules in advance and usually communicate them to the community. Many projects publish a token unlock calendar to keep you in the loop as well. Some projects use smart contracts to automate unlocks.
These events can occur monthly or quarterly, or at virtually any interval that a founder or team deems necessary. They can also happen all at once, but this is generally not a common practice.
You can look for token schedules in a project’s documents. However, public dashboards (e.g., Tokenomist) may also show real-time unlock schedules. When founders are transparent with the schedule it prevents panic around unlocking events.
There is generally no fixed rule or legal standard for releasing a certain number of tokens at a time, but there are a few methods.
To summarize, from a founder’s perspective, token unlocks aren’t just about releasing tokens — they’re about managing liquidity, compliance, market perception, and long-term sustainability.
How do token unlocks affect crypto prices?
While some believe that token unlocks inevitably exert downward pressure on price, others believe that they are already priced in and price changes stem from demand and utility.
Negative price impacts
In many cases, token unlocks do lead to sell-offs, especially when a significant portion of the supply enters the market. For example, Apecoin had a linear team unlock of 0.7% per month (about $11 million worth of APE at the time) starting in March 2023. The ApeCoin team held a substantial portion of the total token supply (47%).
With a market cap of $1.6 billion, APE’s price dropped by 77% over the next six months. On-chain data showed the team depositing tokens into Market Maker OTC accounts, most likely to sell their holdings.
The team planned to unlock treasury allocations over a period of four years. This meant that the selling pressure from team holdings would persist for a considerable amount of time.
This consistent influx of tokens has made it challenging for the token’s price to recover. If you were aware of APE’s token unlock schedule in advance, you probably would have avoided buying it at launch or around the first unlocks.
Positive or neutral effects
It is certainly true that token unlocks can negatively affect price. However, they can also have neutral effects or not impede positive ones. Optimism’s June 2022 unlock, while initially causing some selling pressure, demonstrated how a well-designed ecosystem unlock can drive growth.
The unlock allocated about 3% of Optimism’s market cap to the Governance Fund. Over the next 60 days, 36 million OP tokens were distributed to 24 different projects, focusing on market-making and participation incentives.
This OP token unlock was successful because the tokens were distributed for the purposes of market making. This increases liquidity in the market and increases the token’s availability.
In other words, the Governance Fund allocated OP to various projects, many of which were DeFi protocols to stimulate adoption and usage. DeFi protocols received tokens to distribute as incentives (e.g., yield farming rewards, governance incentives, etc.).
Why are token unlocks important?
Token unlocks are important because they maintain the balance of incentives between the various investors, consumers, regulations, and the project itself. The various components often do not have the same goals.
Project developers gradually release coins or tokens over time to ensure that a project survives long into the future. Token unlocks involve multiple stakeholders, like investors and team members, making their execution important for maintaining trust and reputation.
Token holders may feel disaffected if early investors are allowed to dump their tokens, threatening the livelihood of any underlying products or services.
At the same time, early investors must have a way to reap the rewards of bootstrapping a project early on, as success is often not guaranteed. All in all, token unlocks create an interdependent relationship where stakeholders don’t have mutually assured success, but they do have mutually assured destruction.
Therefore, companies design token unlock strategies to:
- Reduce legal risks (securities laws, fair trading regulations).
- Prevent crashes from mass unlocks.
- Align incentives between the team, investors, and users.
Regulatory compliance
So far, we have covered how token unlocks affect prices and investors. But there’s another critical factor — regulatory compliance. Poorly structured unlocks (or no unlocks at all) can attract legal scrutiny, especially if they resemble market manipulation or unregistered securities.
Securities laws
In many countries, early investors can’t immediately sell their tokens. For example, in the U.S., SEC Rule 144 requires investors to hold tokens for at least 12 months before selling. These restrictions exist to prevent early investors from dumping tokens on retail buyers.
If investors get tokens without restrictions and dump them immediately, regulators could classify the project as an unregistered security. This happened in high-profile SEC cases against Ripple (XRP) and Telegram’s TON token.
To stay compliant, projects spread out token unlocks, use vesting cliffs, and ensure tokens serve a utility beyond speculation. By doing so, they avoid legal trouble while keeping their ecosystems stable.
Token unlock schedules can help you time investments
Before investing in a token, you may consider its market cap, total supply, or fully diluted valuation (FDV). Now, you can add token unlocks to that list of variables to factor in. Make sure you understand whether a project has designated a token unlock schedule, then use this information to work out whether it is the best time to invest.
However, we advise you don’t count on an unlock making a huge difference to a coin or token’s price. While most unlocks in crypto do lead to negative price pressure, the impact is negligible with well-thought-out unlocks and products with actual utility. They can also help project’s avoid any regulatory scrutiny.
Disclaimer: This article is for informational purposes only and should not be considered investment advice. Even if you determine a crypto project has a “good” token unlock schedule, you should proceed with caution. Do your own research (DYOR) and never invest more than you can afford to lose.
Frequently asked questions
Token unlocks make cryptocurrency that was previously unavailable for trading become available. A project can lock the crypto allocated to investors or the team, or lock crypto from the total supply in general. These mechanisms are often done to maintain price stability and avoid regulatory scrutiny.
Token unlocks typically have negative impact on crypto prices. However, this impact can be negligible for projects with demand and utility. Additionally, projects that do not release a large amount of crypto at once can reduce the negative price impact as well.
They balance the incentives of the participants. Crypto projects often have a multitude of users at various stages in their lifecycle. These participants do not always have the same goals, and unlocks help balance the needs of the investors, users, and team members, while remaining in compliance with the law.
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