New lockup features to better manage vesting and lockups together with Liquifi

What is the difference between token vesting and lockup? 

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We commonly see token vesting and lockup used as interchangeable terms, which is incorrect. Vesting and lockups have their purpose and legal, tax, and compliance considerations.

Refer to this article for more information on when to use vesting versus lockup for token agreements.

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What happens if you use vesting and lockup managed in crypto incorrectly?

Because vesting tokens has potential tax implications, you need to be clear about when someone is vesting tokens or when the tokens are in a lockup period. Typically, when you transfer ownership of the token, that creates a taxable event, and the token price on the date of transfer determines your taxable income.

You may be mishandling your taxes if you accidentally forget to pay taxes on the vesting or transfer of tokens or try to pay taxes when a lockup period expires.

Furthermore, the rules around accelerated tax strategies and determining token ownership status are critical to ensuring you appropriately handle these situations. An unintentional error may have significant financial consequences.

While technically, the vesting and lockup mechanisms seem similar, they have different legal implications.

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What’s new with Liquifi’s lockup v2

With our new lockup design and architecture, we can now enable new lockup use cases. 

Configuring who owns the lockup contract (i.e. who can claw back the tokens, which wallet address is assigned as the beneficiary) is critical for determining the right ownership status.

Supporting different types of lockup configurations (milestone-based, non-linear unlocking rates) will be coming to Liquifi’s platform soon.

Lastly, our platform also allows you to use a qualified custodian partner to enforce lockups as an additional option besides using a smart contract. This is a common setup we’ve seen for larger-scale teams that use a qualified custodian. Liquifi lets you set up and track these lockup schedules across all your stakeholders to see when tokens will unlock easily.

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How does Liquifi help you set up vesting and lockups?

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Liquifi allows you to specify your vesting schedule (linear or custom rate of vesting) and add a lockup period on top.

Lockup periods can vary, and we’ve seen options such as:

• 100% of the tokens unlock on a specified date
• The unlock period has a 12-month cliff and a monthly unlocking frequency thereafter

The unlock rate follows a similar pattern to vesting, and the Liquifi platform allows you to stack these together.

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After creating your vesting and lockup schedules, your stakeholders can log in to their portal and view when their tokens can be claimed/delivered.

Tokens in lockups stay in an escrow wallet, custodian vault, or smart contract until they unlock (to enforce the restriction of selling or transferring the tokens). After the tokens are unlocked, the tokens are sent to the stakeholder’s wallet.

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Get started with the easiest solution to distribute tokens to employees and investors

Interested in understanding the complete process? Download our one-pager to learn more, or contact bd@liquifi.finance to discuss your use case.