Community Submission - Author: Anonymous
The term token lockup refers to a specific period of time in which cryptocurrency tokens cannot be transacted or traded. Typically, these lockups are used as a preventive strategy to maintain a stable long-term value of a particular asset. This may help to prevent the holders of big bags to sell their tokens all at once in the market, which would likely cause prices to tank very quickly.
It is common to see massive sell-offs after Initial Coin Offerings (ICO) where early investors (or even the project’s team) end up selling their holdings right after the cryptocurrency hits the market, causing massive drops in price. So token lockups are used to avoid this from happening and they bring an extra level of confidence to the potential participants of a token sale.
Token lockups may also be called vesting periods. These are often set as one or two years after the launch of a cryptocurrency. For example, if a startup creates a cryptocurrency and launches it through an ICO, they may define a lockup period for the team of two years, meaning that no team member will be able to access their tokens before the lockup period ends. This brings a positive sentiment about the project and the team as it will likely keep them motivated to focus on long-term work, without worrying about the market value of their token.