Token Lockup

Token lockup refers to a specific period during which cryptocurrencies are prohibited from being traded or transacted. These lockups are typically intended to maintain a stable long-term value for a particular asset.

Lockup periods allow projects to raise more funds, as both the demand and the value of the token increase. However, the primary purpose of implementing a lockup period is to protect the market from an excessive influx of tokens, which could diminish the token's value due to increased sales.

In addition, significant sell-offs are often associated with initial coin offerings (ICOs). In ICOs, the project's initial investors or founders sell their shares shortly after the cryptocurrency enters the market, resulting in significant price drops.

To prevent this, token lockups are introduced to provide additional assurance to potential token sale participants. Because the locked-up tokens are not part of the total supply, they are not factored into technical analyses conducted by investors and traders.

Furthermore, developers publicly establish a token lockup schedule for their community. They set up smart contracts and allocate a specific amount of tokens to a cold wallet, which is locked for a predetermined period, such as a few months. They must also strictly adhere to the token lockup guidelines for the team, advisors, private sale participants, and public sale (IEO) participants.

This practice instills trust in the project and the team by encouraging them to focus on long-term development rather than the market price of the cryptocurrency. It also helps to strengthen the trust of individuals who support the project.

Locking up tokens is one of the methods used to maintain price stability. The tokens that have been locked up are not included in the overall supply. Instead, they are designed to prevent transfers after a cryptocurrency's initial public offering, so neither team members nor investors can access their tokens until the lockup period expires.

This serves as an incentive for team members to focus on the project's success rather than rapidly selling their holdings after the launch.

In the DeFi industry, efforts are being made to address important issues such as protecting investors from fraudulent projects and allowing project developers to lock their tokens to secure the trust of their ecosystem.

Due to the increasing prevalence of crypto scams and rug pulls in the DeFi market, investors are urging developers to lock their liquidity and mitigate the risk of founder manipulation.