WHAT ARE NFTs and CAN IT BRING A SHIFT IN THE MUSIC INDUSTRY?

What is an NFT?

NFT stands for NON-FUNGIBLE TOKEN or if put simply Nonreplaceable tokens or digital assets. Non Fungible assets could be anything you own, for example, an artwork you made, a game collectible, a card, or even your jacket. Non - Fungibility represents that the items either in the digital or real-world cannot be replaced by an identical item like how a Five Dollar bill can be easily replaced by another 5 dollar bill or 5 units of one dollar bill because in any case, the replaced item holds the same value. While in the case of NFTs these are unique items holding unique attributes and values with ownership records being stored on the public blockchain.

Example from a Music only perspective - For instance, your favorite artist decides to release only 10 limited edition copies of his hit single in the form of vinyl exclusively signed and numbered by the artist itself and you decide to buy one of them. Now you are lucky to get hold of a limited edition copy numbered 1 out of 10 copies only, and if someone comes up to you and asks to exchange your copy for his copy (numbered 5) then in that case even though both of you own the same song but not exactly identical copies of the same vinyl. The vinyl copies owned by all the 10 respective owners of the limited collection have unique attributes and value to them and thus they are non - fungible.

A brief History of NFTs -

Even though the Music Industry is buzzing with the idea of NFTs, the fact is that early experimentation in the NFT world did not start with music but memes, GIFs, and Games.

The history of NFTs can be traced back to as early as 2014 when Anil Dash and Artist Kevin McCoy revealed their first NFT project as Monetized Graphics. Then came in 2016 - Rare Peeps, illustrations of the Pepe the Frog character built on the Bitcoin counterparty system. Then came CryptoPunks, the first NFT experiment on the Ethereum Blockchain. In 2017 NFTs entered the mainstream with CryptoKitties, a game centered around breedable, collectible, and oh-so-adorable creatures called CryptoKitties! Each cat is one-of-a-kind and 100% owned by users, it cannot be replicated, taken away, or destroyed. The CryptoKitties caught the eyes because the idea of owning a 1000$ digital kitten sounds so absurd which only exists in the digital realm, you can’t feed it or pet it physically yet you can own them, breed them or even race them against each other on KittyRace.

Not much can be found regarding NFTs in relation to the Music Industry before 2020, only after the world was hit by the Covid-19 pandemic some musicians started experimenting with NFTs. Artists like 3Lau, Grimes, Steve Aoki, and more sold their art as NFTs and made a considerable amount of money selling them, and now even record labels like WMG have started jumping into the new territory of NFTs.

What problems can NFTs solve for the Music Industry?

Provenance/Ownership - NFTs can solve the problem of the Provenance/Ownership Record faced by digital art. Before NFTs there was no full-proof method of recording ownership data of digital art, yes it was available for consumption and even a fan could own them but there was no way to validate that and NFTs are solving that by recording the ownership data on public blockchains.

Direct Artist to Fan relationship - NFTs are also trying to solve a problem that has been plaguing the music industry for so long, that is the Direct Artist to Fan relationship. The current streaming model is flawed, a major portion of the streaming income generated goes to record labels, other intermediaries, and the top 1% of the artists. In that value chain also Artists are the ones who are least compensated even when the whole industry is being built upon their art. NFTs promises to solve that problem by minimizing intermediaries and providing a new model where fans can directly own an artist’s work where most of the monetary compensation goes to the artist and fans can also trade these owned pieces of digital art in the secondary market and make some money while doing that.

Royalty Sharing made easy - The smart contracts which are an integral part of the blockchain ecosystem are trying to solve the Royalty Sharing problem, where Copyright data can be recorded on the public blockchain and with smart contracts in place which can enable the transfer of royalties transparently to respective owners.

An example of this could be Blue Box, a suite of blockchain-based tools launched by distribution and services company Ditto Music. Bluebox uses the blockchain to record full or fractional ownership of recorded music and/or publishing copyrights and splits royalty payments accordingly. Ditto believes the platform will lead to “higher collection rates [while] massively reducing the loss of earnings currently experienced by artists”.

Another Business model using NFTs could be where Artists can sell part of their copyrights to finance an upcoming album and in return offer a share of their Royalty to those who bought those fractional copyrights. A company called BAND ROYALTY is already doing something similar to this.

Music can become a true perpetual Asset - The idea that recorded music is a true perpetual asset has always been there but now this could become a mainstream idea. NFTs enabling ownership/provenance, true digital scarcity, the ability to have fractional ownership of digital art, tradability, and liquidity could actually give rise to an ecosystem where recorded music is being speculated and traded by the mainstream audience. A scenario where a fan is able to own a piece of art, trade it, profit from it, or maybe mortgage the asset and take out a loan.

A Shift in the Value Chain - Can NFTs bring a shift in the current value chain in the music industry? Right now the creators/artists sit on the bottom of the value chain ladder of the music industry with Record Labels on Top. NFTs have the ability to bring a major shift in that value chain where artists could be on top of the chain, it could liberalize the whole ecosystem.

For Example, Imagine a music streaming app where every song uploaded is also being minted with ownership data, smart contracts being deployed to record fractional ownership and subsequently helping in automatic royalty distribution with no intermediaries, In-App tokenomics to decentralize governance and reward users for engagement with the platform, Artists being paid for actual streaming numbers (unlike Spotify) and advertising revenues generated from their particular content (in case of a freemium model). There is scope for developing business models where there is utility and value for both artists and consumers.

Conclusion -

NFTs right now are highly speculative, the whole movement feels like the early Bitcoin movement where everybody was jumping on the ship to get a piece of the pie. The values are probably inflated right now because NFTs have just started to get into the mainstream and every day more mainstream players are embracing this new technology. It is an exciting time to be in this space, the music industry is facing such strong challenges with almost no live music, music festivals, and touring. Artists are looking for ways to shift from the touring and T-shirt selling business and trying to find ways to make a sustainable income from their art.

I believe more adoption of this technology in the mainstream with better use cases that are both user and artist-centric can actually give rise to a more fair music ecosystem as a whole.