The music industry has undergone a major transformation in recent decades due to the steady decline of physical record sales, and the income streams of artists and labels have changed dramatically. Whereas not so long ago revenues were primarily generated through record sales and live concerts, nowadays multiple, smaller income streams are usually necessary to make a living from art. In addition to streaming income, merchandise, royalties, concert fees etc., the direct path between a musician and the fan is more popular than ever before – Patreon, Bandcamp, Ko-fi, crowdfunding and brand cooperations are just a few of the platforms and keywords that have gained in importance for music creators. And if you look at the developments in terms of numbers, you’ll see that some fans are quite willing to support their favourite musicians financially. Those who can secure these so-called “super fans” can look forward to an astonishingly reliable income as content creators. This article highlights yet another way to build a direct trade with “super fans”.
In the context of the growing popularity of cryptocurrencies and blockchain methods in general, a new distribution concept for music has recently made a splash: NFTs! The fuzz is mainly due to the high sums of money that individual artists (including Tory Lanez, Deadmau5, Grimes or Kings Of Leon) have been able to achieve with this format on relevant auction portals. The buyers are wealthy fans and investors who hope for an increase in value or simply want to support music creators.
What are NFTs?
NFT stands for “Non-Fungible Token”. NFTs therefore represent unique goods. They differ from “fungible tokens” primarily in that they have an individual value. Thus, it is not a monetary unit that is exchangeable in itself and has only a general exchange value (it does not matter which Bitcoin or which Euro you own, only the quantity counts), but a unique object. An NFT can basically represent anything that has individual value, such as physical possessions or digital artwork.
The application of blockchain technology thus makes it possible to assign an owner even to digital goods such as songs. This means that digital works of art can be traded on art auctions just like physical ones. Just as art prints and copies can be made of the Mona Lisa, a digital work traded through NFT can be easily copied. However, the ownership always remains uniquely stored in the blockchain. It is therefore more of a certificate of ownership than an actual unicum.
To put it simply, a chain of information is used for this purpose (the so-called “blockchain”); this is completely traceable and contains the information of every past transaction in the chain. As a result, it is possible to trace at any time in whose possession the NFT is at the moment. Since every blockchain in the transaction network is available hundreds of times as a copy, it is very forgery-proof, because all copies would have to be changed at the same time.
There is the possibility of including so-called smart contracts in the blockchain and thus binding certain conditions to the NFT sale. A smart contract is basically nothing more than a contract that is recorded in code and is thus unambiguous and binding. If a case regulated in the contract occurs, the corresponding consequence is automatically fulfilled, no further communication is necessary.
This is where a particularly exciting application comes into play, which has not been feasible in this form in the physical art world until now: Smart contracts allow authors to participate in the resale of their NFTs – the contract is part of the NFT and is executed fully automatically, so there is no way to cheat authors out of their share. This is a sensible model; after all, artists are actively working to increase the value of their brand and thus their earlier works, so why shouldn’t they earn a share?
Like most common blockchain technologies, the transaction of NFTs involves a very high computing effort and thus energy consumption. Thus, the trading of NFTs and cryptocurrencies is anything but climate-neutral or ecological. However, since the high energy consumption is mainly due to the consensus model used to form the blockchain (“proof-of-work”), this fact is not incontrovertible, as there are in principle also other more ecological consensus models that could be used in the future.
NFTs can so far only be traded against certain cryptocurrencies (mainly Ethereum) and on corresponding platforms (e.g. Rarible or OpenSea). So both buyer and seller need an appropriate wallet to participate in the NFT market.
Are NFTs the Future?
There are certainly different opinions on this and I do not presume to be able to make a final assessment of the matter. Therefore, here is only my own subjective and current evaluation of the situation: I feel that it is, to a certain extent, social progress that pieces of music can also achieve a collector’s value in digital form on auction platforms and, in principle, I also find it completely legitimate when investors and speculators get involved in this sector. Above all, the possibility for authors to participate in the increase in value through smart contracts is, in my opinion, a great idea and very fair matter.
For me, however, it is questionable whether blockchain technology offers a unique advantage here. Since we are not talking about actual unique items, a musician or artist could also issue simple certificates of ownership instead. These could also be traded or auctioned in physical form as merchandise, for example.
In my opinion, the biggest problems of NFTs are currently (still?) the enormous energy consumption and the limitation to the crypto market. This excludes fans who are not into crypto, but could also deter conservative investors. Both the environmental drawbacks and the restriction to direct trading against cryptocurrencies may eventually change, however, and in my opinion they should if trading NFTs wants to be more than just short-term hype.
However, I think the possibility for authors to participate in the value growth of their works in an uncomplicated way is a small revolution. The idea is great and can be implemented directly in the NFT with smart contracts. Though again, the exciting thing is the idea rather than the specific technology – it’s not impossible to implement similar models in other ways in the music market. Nevertheless, smart contracts will always remain one of the safest and most reliable ways to enter into a contract due to their automatic fulfilment.
What are your thought on NFTs? Do you think it could be a relevant source of income for musicians in the future? Have you had your own experience with trading NFTs? Let us know in the comments!