1/ Babylon is closing in and with it, the time we get real #dex's on #radix. In this educational thread, we'll talk about locking and vesting and why they're important for #cryptocurrency investors.
2/ Let's start with an example of locking. Suppose Joe creates his own meme token, ElonFloki ($ELFLO), and mints it on the network. For the token to start trading on a DEX, Joe needs to list it to a DEX and add liquidity.
3/ Liquidity is usually paired with native currency. So Joe needs to add ELFLO + XRD to a DEX. Let's say Joe adds 1000 ELFLO + 1000 XRD as liquidity to a DEX. Starting price of ELFLO token is now 1 ELFLO = 1 XRD since he added the same amount of both.
4/ When Joe provides liquidity to the exchange, he receives LP tokens that represent his ownership of the liquidity pool. If Joe decides to remove his LP tokens, it can negatively impact other investors and make the ELFLO token worthless.
5/ To prevent this, Joe can use RadLock to lock his LP tokens for a certain period. This ensures that other investors can trade without worrying about a sudden loss of liquidity.
6/ Let's say a new investor called Ivan comes and buys 100 ELFLO tokens for 100 XRD. This means that Ivan puts 100 XRD into the liquidity pool and gets back 100 ELFLOs. There’s now 1100 XRD in LP and 900 ELFLO.
7/ Since Joe owns 100% of liquidity, he can exchange his LP tokens to get back 1100 XRD + 900 ELFLO. Ivan cannot sell his 100 ELFLO's anymore because there’s no XRD in liquidity pool. Ivan’s ELFLO's are now useless.
8/ But wait! There’s a way Ivan can be protected, and that's when liquidity locking comes into play. Joe could have locked his LP tokens for a certain time period (let’s say 1 year) through RadLock, and he wouldn’t be able to access them.
9/ This means Joe cannot exchange his LP tokens to get back 1100 XRD and 900 ELFLO tokens until 1 year passes. This means Ivan will surely be able to sell his 100 ELFLO tokens in that time period. Ivan’s investment is protected.
10/ Now let's talk about vesting. This is when the team behind a token decides to release their tokens to the market over a set period, usually to incentivize the team to create value for the token.
11/ For example, let's say Joe minted 3000 tokens all together, put 1000 $ELFLO equal 1000 XRD into liquidity pool, and kept the remaining 2000 tokens for himself or his team.
12/ Even if LP tokens are locked, after a new investor buys ELFLO, the price might go up, and Joe could sell his team tokens, making the investor's ELFLO worth less.
13/ To prevent this, Joe could vest his team tokens for a certain period, let's say a 4-year period, where 25% of team tokens will unlock after each year has passed. After 1 year, Joe will be able to sell 500 of his ELFLO tokens, after 2 years 1000, and so on.
14/ This makes Joe incentivized to provide value for his token because if he doesn't, when his team tokens unlock, they might be worthless.
15/ We hope this summary has been helpful. If you have any questions about locking and vesting, please feel free to ask!
16/ Locking and vesting are important mechanisms that help to ensure a fair and stable trading environment for cryptocurrency investors. By understanding how they work, investors can make more informed decisions and protect their investments. #cryptocurrency #investing #Radix.
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