Steemit Crypto Academy Contest / S11W6 - Token Unlock

Edited using Pixellab App

Greetings everyone and welcome to my engagement post for the crypto academy community, hope you get to learn something new as always from this week's topic of discussion. The week, we ate discussing about Token Unlock so don't miss it for anything.

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Use your own words to define what an unlock token is. And in your opinion, why do some projects choose to lock a quantity of these tokens?.

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Unlock Token is a terminology coined from two unique words, "Unlock" and "Token". Knowing their basic meanings can help us out with the compound meaning, so shall we?

Unlock in its literal meaning is to undo a lock, using a key, password, or any other form of authentication to gain access. In simpler terms, it means to open up something that has been locked or restricted. Whereas,

A Token is anything that serves as a visual or substantial representation of an item, a fact, or a quantity of something. That is to say, a token is representative of something, however in the cryptocurrency world, a Token is said to be a digital asset that operates on a blockchain network. So then, what's "Unlock Token"?

Unlock Token hence is the process of undoing, giving unrestricted access, or gaining access to a digital asset (cryptocurrency). As earlier stated, unlocking is only used when there was a locking in the first place, hence Unlock Token is the staggering release of precise quantities of a token (cryptocurrency) that had been locked up or frozen.

But then, what does it mean to lock a token, and why do some projects choose to lock a quantity of their tokens?

To lock a token means to restrict a token from being transferable, traded, or transacted, for a specific period. During this specific period of a token being locked, investors are restricted from selling, trading, or transferring their tokens.

The objective of locking up a token is to encourage long-term investment in a project and prevent the sale of the token in large amounts in other not to overflow the market and cause price volatility.

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Clearly explain the method(s) by which these tokens are locked and then how they are released.

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There are various methods of locking tokens based on the goals of the project, however, every token lock is usually held or carried out using smart contracts. Therefore, these Locked tokens are simply stored in smart contracts and only discharged when specific conditions are met. Below are some examples of methods in which tokens are locked.

Time-based lockup: This method of lockup restricts access to the use, trading, and transferability of a token for a specific period. For instance, tokens can be locked up for 6 months, 1 year, 5 years, 10 years, etc. Such lockup only allows access to the token or unlock time when the time programmed has elapsed. Hence, encouraging users/investors to invest in the long-term growth of the project

Milestone-based lockup: This method involves the locking up of a token till a certain landmark or objective is attained. That is, tokens are locked up until the project sets up its Mainnet, attracts a certain number of users/investors, or attains a specific yield goal. Hence, unlocking such lockup is only possible when these milestones are achieved. This type of lockup encourages investors to support the project's growth and development.

Performance-based lockup: Under this method, tokens are locked up with investors allowed access if and only when certain metrics are achieved. For example, here on Steemit, Steem Dollar's reward is tied to the price of Steem. Users/investors only receive Steem Dollar (SBD) when the Steem price attains a certain metric. To unlock tokens under such a method is to support the growth and success of the project.

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What is the impact of an unlock token on the price of a crypto and how is it monitored? Give an example.

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Keep in mind that locked tokens are not part of the circulating supply but rather considered under total supply, and also that token unlocks mean an increase in circulating supply. One might wonder if token unlocks (increase in circulation) would result in a decline in the value of the token considering the law of demand and supply. However, that is not always the case.

It is understood that in the case of unlock tokens, the size of the unlock and the project’s overall prestige play a significant role in the market’s reaction to this event. However, significant unlock may initiate panic selling among users/investors who fear a price drop. An example is the EOS token, when the EOS tokens were unlocked in 2018, there was a significant drop in the value of the cryptocurrency due to panic selling.

Screenshot from CoinMarketCap

the price before the unlocking the token SS from CoinMarketCap	the price for the reminder of the year SS from CoinMarketCap

On the contrary, if the project is well-regarded and the unlock is expected, it can strengthen users'/investors' morale by boosting liquidity and showcasing the project’s long-term plans. An example is Bitcoin Cash, in December 2020 when Bitcoin Cash tokens were unlocked, it led to an initial drop in price due to the increase in supply. However, the price of Bitcoin Cash recuperated, indicating the solidity of the project.

Screenshot from CoinMarketCap

	The price of Bitcoin Cash before the Token Unlocking, SS from CoinMarketCap

The price of Bitcoin Cash after the Token Unlocking, SS from CoinMarketCap

	The price of Bitcoin Cash later that month, SS from CoinMarketCap

How can one monitor Token Unlock?

Monitoring an impending Token unlock is only achieved by analyzing the Impending Unlocks. This involves studying the trail and unlocking programs of the projects of interest. Knowing when the unlock will take place and how many tokens are slated for release can provide useful insights, helping one to organize their investment scheme in advance. You can get access to such knowledge through the projects white paper and following updates about the project.

All this can be achieved using the Token.unlocks.app as it is a platform that allows users/investors or interested investors to analyze and study all the above details. Below are examples using DYDX and 1INCH coins.

Information on DYDX Token Unlock SS from Token.Unlock.App	Information on 1INCH SS from Token.Unlock.App

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Do you think that all cryptocurrency ecosystems have developed this kind of lock? Steem.Inc Among them? If yes or no, do you think it is or will be beneficial if used or added to its ecosystem? For what?.

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I can't prove that all cryptocurrency ecosystems use or have developed the idea of token lock as there are millions of cryptocurrencies in the world right now working under different consensus mechanisms. But, since most cryptocurrencies came into existence through Initial Coin Offering (ICO) and support airdrop, I would say most cryptocurrency ecosystem utilizes token lock.

However, the idea of a token lock comes with the proof-of-stake (PoS) mechanism which allows users/investors to lock up certain quotas of their rewards or investments, hence, every cryptocurrency ecosystem that utilizes Proof-of-Stake (PoS) mechanism such as Ethereum and Steem utilizes Token Lock.

Steem.Inc. is rightly among the cryptocurrency ecosystems that utilize token lock as seen with Steem Power (SP) and Steem Dollar (SBD). Earlier I gave Steem Dollar as an example of a Performance-based lockup method because it's tied to the market performance of Steem.

Screenshot from Steem Whitepaper, pg 21

This explains why users don't get Steem Dollar (SBD) rewards when the price of Steem is below a certain benchmark.

However, Steem Power is a Time-based lockup, this is because when our rewards for curation or content creation come, it comes in the form of Steem and Steem Power (SP) of which Steem Power is restricted (Lockup) from being transferred, traded or transacted.

Screenshot from Steem Whitepaper, pg 8

For Steem Power to be Traded, Transfered or Transacted, the user will have to undergo a process called Downpowering to unlock the token. This process usually lasts 1 month (previously known to be 13 weeks period), for the user to unlock all of its Steem Powers (SP) making it a Time-based lockup.

Screenshot from Steem Whitepaper, pg 8

The idea of locking tokens in Steem.Inc. I believe this is a befitting act as there are a lot of benefits that come with locking tokens, such as;

Long-term gains, as it means that users/investors are committed to the success of the Steem project.

Reduced risk, Locking tokens can help reduce the risk of an impulsive dip in price due to large sale-offs as the tokens locked are not transferable nor can they be traded, which also leads to stability and reduced volatility.

Increased trust, Locking tokens will boost trust between users/investors in the project, as this means that they are committed to the long-term success of the project and are ready to take actions to bring about stability and growth of the token.

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List the risks and benefits of unlocking tokens simply and understandably.

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Benefits of Unlocking Tokens

Increased Circulation Supply: With tokens unlocked, it means more tokens make their way into the circulation supply, hence increasing the circulation supply.

User Accessibility: It increases the circulation supply of tokens, meaning more users can get access to them.

Risks of Unlocking Tokens

Price volatility: There is always a risk of sudden price dips due to users/investors selling off tokens in large amounts.

Going Short-term: With token unlock, there is every possibility that users/investors would focus on short-term gains rather than build long-term success.

Lack of confidence: Tokens unlocking may bring about a lack of confidence in users/investors in the stability and long-term growth potential.

CONCLUSION

Unlock Tokens, being a means of distributing tokens to investors bears the possibility of risking the decrease in a token price after unlocking due to a sudden increase in circulation supply. However, token unlock is unlikely to increase or decrease the value of a token it is just a factor among other factors (tokenomics) affecting the price of tokens.

I wish to invite @yakspeace, @ninapenda, @ruthjoe, @drhira and @suboohi

Thank You for your Time

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NOTE: Always have a smile on your face, as you are never fully dressed without one.