A token lockup is a time period during which a crypto project decides to bar participants from transferring or trading tokens.
Understanding the term
The need for a token lockup period arises right after successfully closing a token sale so that any cryptocurrency project remains safe against price manipulations. As token lockup sets in, participants are not allowed to sell or transfer their tokens. There would be minimal to no liquidity issues with a crypto project’s tokens once they are secured in the vesting period. A team might choose to announce a token lockup while building the project and keeping their support base secure.
Token lockups are needed now more than ever in the world of crypto because of price manipulation and to retain stable long-term value. It has become a norm, specifically within the DeFi sector, where investors lose a significant amount due to abandoned projects (exit scams), and fraudulent project updates, among others. By choosing to lock tokens for a certain time, emerging DeFi projects are re-building the confidence of investors in the community.