Milestone Vesting in Web3: What is it and what are the benefits?

Web3 has brought about a new era in the world of finance and technology, with tokens being a central element to various blockchain-based projects and dApps.

Token vesting is a crucial aspect in the lifecycle of a project, ensuring the long-term commitment of its founders, investors, and team members. In this article, we will delve into milestone vesting, a unique approach to Web3 token vesting, and explore its benefits.

What is milestone-based vesting?

Milestone vesting (also known as performance-based vesting) is a type of token vesting schedule where tokens are released to the recipients in chunks, based on the accomplishment of specific predetermined goals or milestones. These milestones can be project-related, such as the launch of a new product, the successful completion of an audit, reaching a user base target, etc.

Milestone vesting helps align the interests of all parties involved in the project, ensuring that token holders, founders, and team members are motivated to work toward the success and growth of the project. By tying token releases to the achievement of milestones, it fosters a sense of responsibility, encouraging the team to focus on key objectives.

Who is milestone-based vesting for?

While traditional time-based linear vesting can often be sufficient, there are scenarios where milestone-based vesting could be a better alternative to linear vesting.

Milestone vesting can be particularly relevant for employees holding roles with clear goals and responsibilities. For example, marketing, BD, and engineers responsible for achieving specific targets, such as web traffic, revenue, or project completion, can benefit from a milestone-based vesting schedule. This ensures accountability and incentivizes them to perform based on merit rather than just tenure.

Additionally, milestone vesting may also be suitable for consultants and advisors, as they usually engage with a company for a shorter period compared to regular employees. By tying their token distribution to the completion of specific deliverables, milestone vesting ensures that their contributions are aligned with the project's goals and objectives.

Milestone vs Time-based vesting

Milestone vesting and time-based vesting are two distinct approaches to distributing tokens. While milestone vesting focuses on releasing tokens based on the accomplishment of specific predetermined goals, time-based vesting operates on a linear schedule, granting tokens over a set period regardless of the achievement of any particular objectives.

Each method has its unique advantages, with milestone vesting promoting accountability and performance-driven results, while time-based vesting ensures a predictable and steady distribution, theoretically fostering long-term commitment.

In some cases, a combination of milestone and time-based vesting can be employed to leverage the strengths of both methods. For instance, a DEFI project may have 4 milestones:

1. Launch on mainnet
2. Reach 10,000 unique users
3. Get to $10,000,000 in TVL
4. Reach $100,000,000 in translation volume

After each milestone is reached, 25% of the tokens can begin to be released following a linear distribution curve where each block of tokens unlocked from the completion of a milestone is vested over a certain period such as 6 months. In other words, each milestone acts as a cliff period which is performance-based rather than time-based.

How milestone-based vesting can help align ecosystem participants?

Traditional time-based linear vesting models, while commonly used, can present certain challenges within the Web3 ecosystem. Such models may inadvertently incentivize founders to focus on short-term goals, often leading to the creation of fleeting value as founders are incentivized to pump their token price until their tokens are fully vested.

In Omar Azhar’s (head of investments at Matter Labs) article, “New venture capital structures in crypto markets”, Omar states that KPI-based vesting, a form of milestone-based vesting can be one possible solution to the mismatched incentive structure of time-based vesting for founders.

Omar proposes that tying token releases to the achievement of key performance indicators (KPIs) or milestones encourages all parties involved in a project to focus on sustainable value creation and long-term growth. This alignment of interests helps ensure that founders and investors are working together towards shared objectives.

In addition, Omar points out that KPI or milestone-based vesting can have dynamic elements where the vesting process can be accelerated or decreased with a dynamic vesting multiplier depending on if a project is meeting its KPIs or falling behind.

For example:

If Revenue < Expected Revenue = Reduced Vesting Multiplier

If Revenue ≥ Expected Revenue = Increased Vesting Multiplier

Milestone vesting for grant funding

Milestone vesting is not only beneficial for the core teams behind Web3 projects but also plays a significant role in venture grant funding programs, such as those offered by ImmutableX and Secret Network. ImmutableX and Secret Network provide funding to incubate new projects building within their ecosystem, promoting innovation and growth.

Incentivizing Grant Recipients to Perform and Meet Milestones

Milestone vesting helps ensure that grant recipients are incentivized to deliver on their proposed objectives and meet the predetermined milestones tied to their funding. By tying grant funds to the achievement of specific goals, recipients are motivated to work diligently and efficiently, as the release of their grant allocation depends on their performance.

Mitigating Sell Pressure from Dumping of Grant Tokens

Most venture grant funding programs in the Web3 ecosystem, like ImmutableX, disburse funds in the form of their native tokens. This can pose a risk for the ecosystem if recipients immediately dump their token allocations for stablecoins, causing significant sell pressure and adversely affecting the token's value.

Milestone vesting mitigates sell pressure by releasing native tokens to grant recipients in smaller portions, contingent on the completion of specific milestones in their vesting process. This approach ensures that grant recipients can only claim limited amounts of the native token at a time, which reduces sell pressure on the token.

Milestone vesting for DAOs

Similar to L1 and L2 projects offering grant funding, DAOs are another entity in the Web3 ecosystem that can greatly benefit from milestone-based vesting when offering grant funding. DAOs are community-driven entities that rely on transparent decision-making and resource allocation.

By utilizing milestone vesting for grant funding, DAOs can ensure that the projects they support are held accountable for their progress and are incentivized to achieve the agreed-upon objectives. The milestone-based approach makes it easier for DAOs to commit and fund proposals, as they take on less risk compared to releasing a majority of the tokens instantly.

How does milestone vesting work in Web3?

Milestone vesting can be implemented either on-chain or off-chain, each with its unique advantages and considerations.

On-chain Milestone Vesting

On-chain milestone vesting involves leveraging smart contracts to automate and enforce the vesting process on the blockchain. This approach provides enhanced security, transparency, and trust, as the terms of the vesting schedule are hard-coded and immutable. On-chain milestone vesting also reduces the need for intermediaries or manual interventions, ensuring that tokens are released automatically upon the completion of specific milestones such as a project reaching a certain TVL or other goals that can be verified on-chain. However, it's worth noting that on-chain vesting might not be suitable for milestones that require subjective evaluation, as they may not be easily verifiable on the blockchain.

Off-chain Milestone Vesting

Off-chain milestone vesting, on the other hand, relies on traditional agreements and manual processes to govern the release of tokens. This approach allows for greater flexibility in determining milestones and evaluating their completion, as it can accommodate subjective criteria. In off-chain milestone vesting, the tokens are typically held in a multisig wallet and are released by authorized parties once the predefined conditions are met. In certain cases, token vesting platforms like VTVL that offer milestone vesting can provide a front end for recipients to confirm the completion of a milestone, allowing project founders or other entities to confirm the completion of the milestone and distribute the portion of tokens directly from a dashboard. While off-chain vesting might lack the automation of on-chain vesting, it can be more adaptable to complex or nuanced milestone conditions.

Examples of Milestone Vesting Conditions

Milestone conditions in the Web3 ecosystem can encompass a wide range of objectives, depending on the nature of the project and the roles of the token holders. Some examples of milestone conditions include:

1. Technical Milestones: Releasing tokens upon the completion of specific technical objectives, such as the development of a minimum viable product (MVP), the launch of a project on mainnet, or the successful integration of a new feature or protocol.
2. Business Milestones: Distributing tokens based on the achievement of business-related goals, such as reaching a certain number of users or getting to a specific amount of TVL.
3. Community and Marketing Milestones: Vesting tokens in response to the accomplishment of community-building or marketing goals, such as growing social media presence, increasing platform engagement, or achieving a certain number of newsletter subscribers.

Summary

Milestone vesting has emerged as an effective and flexible approach to token distribution within the Web3 ecosystem. By tying token releases to the achievement of predetermined milestones, it aligns the interests of all parties involved in a project, encouraging commitment and fostering a results-driven environment. For grant funding, milestone vesting incentivizes recipients to perform while often indirectly helping to mitigate sell pressure on the grant token, ensuring a healthy and sustainable growth trajectory for the ecosystem. With both on-chain and off-chain implementations, milestone vesting can be tailored to suit the unique needs and objectives of each project, helping to facilitate long-term success.