What is Token Lockup?

Token lockup refers to a particular time period in which cryptocurrencies can’t be traded or transacted. These lockups usually are seen as a way to keep an unadjustable long-term value of a specific asset.

Projects generate more money with the aid of lock-up phases since both the need and the value of the token grow. The major rationale for having a lock-up phase, however, is to safeguard the market from being assaulted with too many tokens, which decreases the value of the token owing to higher sales.

For instance, the FLOW token creates 1.25 billion FLOW tokens over its token manufacturing and distribution term. Following that, these tokens held their worth from the moment they were locked up for around a year, and the network continued to operate as well.

The lockup period and transfer constraints were established with the token production, guaranteeing that pre-launch investors, members of the team, and community members were all on the same ground.

Moreover, significant sell-offs are sometimes associated with initial coin offers (ICO). In ICOs the project's original investors or those that initially developed the project sell their shares shortly after the cryptocurrency hits the market, and this leads to huge price drops.

So, to avoid this, token lockups are introduced, and they give additional assurance to possible token sale attendees. Also, because the locked-up tokens are not a component of the total supply, they are not considered in technical research performed by investors and traders.

Additionally, the designers create a public profile for the token lock-up for their society. Developers, on the other hand, set up smart contracts and invest a specific amount of tokens in a cold wallet, which is locked for a set period of time, like a few months. They must also rigorously adhere to the token lockup regulations for the team, mentors, private sale members, and public sale (IEO) members.

This instills trust in the initiative and the crew by motivating them to focus on long-term development rather than the market price of their currency. Furthermore, it manages to strengthen the trust of people who assist the initiative.

As a result, locking up tokens is one of the methods used to keep prices stable. Furthermore, the tokens that have been locked are not counted as part of the overall supply. Rather, they are designed to prevent transfers after a cryptocurrency's first public offering, so neither team members nor investors will be able to obtain their tokens until the lockup term finishes.

This acts as a motivator for staff to focus on the good instead of quickly selling their holdings following the launch.

Speaking of the DeFi industry, it is currently solving a few important issues such as how to safeguard investors from fake initiatives as well as giving the ability for project developers to lock their tokens and protect the trust of their ecosystem.

Since there are more and more crypto scams and rug pulls in the DeFi market in particular, investors are requesting developers to lock their liquidity and restrict the threat of founder manipulation.