For many protocols, tokens are often used to decentralize ownership and incentivize ecosystem participants and key stakeholders, which can include investors, employees, community members, and advisors.
Rather than distributing tokens all at once upfront, protocols typically make tokens available to stakeholders over time on a schedule - across the span of many months or years. This serves several purposes:
- Enables the ability to manage circulating supply and sell pressure over time as the protocol grows and reaches maturity
- Ensures stakeholder interests are aligned with the long-term success of the protocol (whether through investor unlocks, community airdrops, ecosystem emissions to participants like node operators, or even employees in the context of vesting)
Preparing for a token launch can be a very hectic time for projects. Magna and Squads have teamed up to cover all the key things protocols need to consider when setting up their token distributions and how to do it securely and accurately on Solana.
What to Keep in Mind When Setting up Token Distributions
Design and determine your vesting/unlock schedules with sustainable tokenomics in mind.
Tokenomics can often be more of an art than a science when it comes to managing token supply and sell pressure, as well as aligning the incentives of the stakeholders with the protocol. There are a number of different parameters defining a vesting unlock schedule for consideration:
Please note: The information below reflects commonly seen themes across token launches for illustrative purposes. Distribution schedules can and will vary significantly depending on the protocol, token utility, launch strategy, and other considerations.
Total Allocation Amount: How many tokens are allocated to each stakeholder?
Allocations range very widely depending on the size and nature of the protocol, the token’s utility, and the project’s launch strategy, but what we generally see:
- Public allocation (sale or airdrop): ~10%
- Ecosystem/treasury: 30 - 40%
- Investors: 30 - 40%
- Team: ~20%
Start Date: When does the vesting/unlocking start?
Unlocking will generally simultaneously begin for all stakeholders at the Token Generation Event (TGE), or when the token is made publicly available (e.g., listed on an exchange), whereas vesting is normally tied to an employee’s start date
Schedule length: Over how much time will the tokens vest or unlock?
Certain allocations (i.e., community, airdrop) may be fully available at launch, whereas larger allocations (ecosystem fund, investors, team) generally vest over 2 - 4 years
Cliff length or initial lockup: How long before the first vesting or unlock event?
Cliffs frequently apply to team and investor allocations as a signal to the broader community of their long-term commitment to the protocol
Vesting/unlock frequency: How often will tokens vest/unlock, and how much will vest/unlock at each interval?
High-frequency unlocks of <1% of allocation at a time may induce less sell pressure compared to large simultaneous unlocks
Make sure you know the difference between vesting and unlocks, and the importance of tracking both.
Unlocks typically refer to the predetermined schedule by which control of tokens is granted to its stakeholders following TGE. This can apply to allocations belonging to the foundation treasury, investors, the team, or the community. Vesting refers to the transfer of legal rights to the tokens– normally within the context of employee grants and incentives. It is important to recognize that vesting and unlocks are different and can apply at the same time, which can affect the amount of tokens that need to be distributed. Read more here.
If you haven’t already, take care of any tax or legal tasks needed to finalize your founder and employee token grants before the token value explodes.
The word everyone dreads - taxes. It is important to understand how tokens will be taxed based on the local jurisdiction, particularly for founders and employees who may have the opportunity to address them upfront before tokens go up. If you are in the US, read more about the 83(b) and what it can do here.
Decide how you want to distribute your tokens.
Once the schedules and allocations are determined, the final step is deciding exactly how the tokens will be distributed to your stakeholders. Generally, there are two ways in which tokens can be delivered:
Direct Transfer:
Tokens are sent directly from the project to each stakeholder’s wallets at each vesting or unlock milestone. This may require more manual work, but makes sense when maximum flexibility is needed (e.g., for tax witholdings or RTUs)
Claim/Escrow:
Tokens are locked up or escrowed in a smart contract, which then become claimable to the stakeholders according to the schedule. Perfect for teams who want to set-and-forget and ensure transparency to the community, but requires secure, audited smart contracts which can be expensive to develop.
Each method has its own benefits and limitations, which are explored in further detail here. In either case, Magna can support your token distributions, allowing projects to easily track allocations, set up custom claim portals, or transfer tokens directly to your stakeholders’ wallets.
Squads X Magna: The Safest Way to Distribute Tokens on Solana
When distributing tokens, crypto organizations require a solution that can meet their security requirements, which most crypto wallets often lack. Standard crypto wallets don't offer the necessary operational setup for on-chain companies to divide decision-making power over their assets and operations like token distributions. This is where a multisig solution like Squads comes in, allowing teams to manage vesting plans collectively rather than with a single private key/wallet.
A multisig solution allows control over on-chain assets to be split across multiple signatures. This can be used for managing treasuries, programs, but also token distributions. When setting up a multisig, members are added, and a threshold is defined for the number of signatures needed to execute transactions. Squads, Solana’s leading multisig solution with over $3 billion in assets secured, has partnered with Magna to allow users to connect their multisig to Magna and set up vesting plans in a secure manner.
Through Magna’s app, stream tokens second-by-second, set up automated on-chain claims with custom schedules, all the while keeping tokens safe in Squads and topping up Magna allocations as needed. Using Squads for vesting means only the multisig has control over these plans. You can transfer tokens directly from Squads to stakeholders and track each schedule on Squads executing through Magna’s program.
This contrasts with traditional single-key wallets like cold wallets, which would give full control of your vesting plans to anyone gaining access to your seed phrase, thus also making collective management with your team impossible. Moreover, using a multisig can reassure your investors and employees that their vesting schedules are safe from malicious attacks.
Setting up your Squads Multisig for Token Distributions
Setting up a Squads multisig to manage vesting plans involves a few steps to ensure the security and efficient operation of token distribution for stakeholders:
- Identify the key members of your team who will act as signatories for your multisig. These should be trusted members who play significant roles in your project's governance or management. Usually, this is the cofounders, and sometimes also includes executives or operators with fewer permissions.
- Use Squads to set up your multisig. During this process, you will need to specify the threshold for performing transactions (e.g. 3 out of 5 members required to execute transactions). Note that the threshold set for the multisig should always allow for an event where one of the members loses their key and it needs to be replaced.
- Within Squads, assign specific roles and permissions to each multisig member based on their responsibilities. Roles ensure members can't execute or vote on transactions unless they were explicitly granted that authority.
- Connect your Squads multisig to Magna’s app using the SquadsX browser extension. This will enable you to create, manage, and execute vesting plans directly from the multisig, adding an additional layer of security and governance to the process as we’ve seen before.
- Through Magna's interface, start creating vesting plans for your stakeholders. Once created, these plans must be approved by the required number of signatures before they are executed.
Lastly, regularly monitor the progress of your vesting plans and manage allocations as necessary. This may involve topping up token allocations in the vesting contracts, adjusting schedules based on new agreements, or canceling plans if required. Again, any changes must be approved by multiple members in your Squads multisig, ensuring your token distribution plans are safe from unauthorized changes.
If needed, you can manage different types of vesting plans (e.g. lead investor vesting vs. employee vesting) by setting different Squads multisigs with different thresholds or permissions for different categories of vesting schedules.
