The Case for Music NFTs

The reason why the NFT bloom started with JPEGs and not other forms of artistic or cultural objects is because JPEGs are the lightest of them all. It is just a picture. A JPEG is light because it carries no legal baggage, and it takes very little capital to make. 

Cultural and artistic objects, long since known to be stores of value, also vary in their financial weight. Paintings and pictures are light; songs are light if they are not already soiled with complex real-world contractual and licensing and royalty agreements; films are extremely heavy.

People have long complained about the uselessness of JPEG NFTs, and how their 3-digit ETH prices are not justified. Blue-chip NFTs are governed by their own logic, and probably one that does not govern music NFTs if the full suite of infrastructure to realise their financial potential matures. It should seem natural that music NFTs should follow JPEGs in the next NFT summer. 

For example, Releap, a music NFT platform built on Solana, allows artists to freely mint NFTs, and grants them priority access for fans, real life tickets, exclusive content. Independent artists can basically use the platform like soundcloud, but every publication is an NFT.  If Releap manages to put together the infrastructure necessary for artists to freely and effortlessly tokenise their music, that same frenzy for JPEGs could well spill over to music NFTs, and therefore a music NFT marketplace-cum-launchpad like Releap.

But music NFTs is not the only model of Web3 music. One does not need to be bullish on music NFTs to be bullish on Web3 music; but one cannot be bullish on music NFTs without being bullish on Web3 music. 

The demand for music NFTs is categorically different from PFP NFTs

Let’s start with something philosophical to establish the need of music today, obvious as it is. 

We in the 21st century demand more music more than ever. We cannot survive without it. Jordan Peterson put it quite beautifully - in the wake of the Enlightenment, where God has been condemned to death by immurement, we can only rely on music to cultivate any form of spirituality. Those of us who labour in the cities cannot keep our sanity without music to help us pretend we are somewhere less godless while in reality we are riding on trains in the modern equivalents of Khazad-dûm.

I find it difficult to believe anyone could derive a sense of spirituality by looking at a picture to the same degree. It is the same reason why people today are drawn to psychedelics, why people become engrossed in identity-politics, why people are so angry about everything. Music is the drug that prevents us from cannibalising ourselves. We cannot stand the deafening silence of the dead air, the loneliness of the 21st century life.

The Problem is Real, but what is the solution? 

Music matters. We demand it. But why would we demand Web3 music? Herein is a critique of the existing Web2 music publication infrastructure is necessary. 

Independent artists basically cannot make it on Web2 - Youtube, Patreon, Spotify. Royalties on Spotify are paid based on an artist’s “market share” - the number of streams for their songs as a proportion of total songs streamed on the service. This essentially means artist payments are measured on a bell curve. Indie artists have very little to lose by redirecting their energy to onboarding and publishing on new Web3 platforms where they will be able to keep the rights and income of their work unavailable in Web2. 

Here’s a highly illustrative example, featuring the highly talented team of the Grissini Project (watch till the end). 

Even well-established big name artists do not feel they have it fair. Record label companies take the lion’s share of the artist’s earnings, and wield control over artists by holding and controlling their masters - the original recording of a song. Taylor Swift’s furious row over her masters being sold by her record company Big Machine Records and TAFKAP the very man himself should already speak much.

But some effort must be spent here to explain why Web3 Music will be comparatively more attractive to Web2 Music. One can talk all about the philosophical ideals of financial and personal sovereignty familiar to all crypto ears, but substantively speaking, here the argument runs into a chicken-and-egg problem where the attractiveness of Web3 Music to both creators and consumers depends on the model of Web3 Music - but we don’t yet have a complete picture of where Web3 Music development is going. 

But migration is not induced by the ultimate evolutionary state of the Web3 ecosystem. As long as there are disproportionate gains near to some people, people shall move. 

But who are the first people to move? This question is equivalent to asking to whom is Web3 Music most attractive to in the short run. 

One of the arguments against Web3 Music I have crossed paths with is “I have spotify so why do I as an ordinary bloke need Web3 music?” You don’t. Because you’re a consumer. But creators do, especially indie artists. 

The exodus of indie artists to the promised land of personal and financial sovereignty, better royalties in Web3 Music will be the main initial migration drive, and their most loyal fans, given the right incentives, will follow them. 

At least that’s how the argument goes. How things actually work out is more complicated, as we shall discuss.

One should note that Web3 Music is not equivalent to Music NFTs, for Music NFTs are not the only means to monetize music on the blockchain. One can very well just copy-and-paste Spotify onto the blockchain. What would it be competitive against Spotify? 

The Pay-per-Stream problem 

But there are very sizeable problems in replicating Spotify on-chain.

The problem is not so much that the model doesn’t work. The problem is that it is extremely difficult to get it off the ground. 

What is the Spotify model? At its core it is paying artists based on some metric of stream count. 

I argued above that indie artists will be the first pilgrims to the land of Web3 Music. The issue is where is their audience? Without an audience that sticks around, there is no streaming. No streaming, no income for artists - not even on paper. Learning how to use crypto is already daunting and troublesome enough as it is - to pay crypto, say precious Ethereum or precious Solana, who on God’s earth would be in the right mind to do so? And this is just to stream - one is going through several hoops of trouble just to listen to music that I could very well listen on Youtube and Spotify. All that trouble and all that money spent, but nothing meaningful in return for me. Why would I do it?

Suppose you as a founder of some crypto streaming platform then decides to make the platform free to gain traction. In that case, then where will your payments to the artists come from? From your own pocket of course, unless you run ads. So you’re facing a really difficult trilemma. Run ads, or charge users, or pay nothing to your artists. Choose your poison. 

Obviously, this trilemma is not an impossible trilemma. It is just a trilemma that any Spotify-like platform must brave through until they gain traction, be they in Web2 or Web3. It’s just that Web3 aggravates the worst parts of the trilemma significantly, and the situation is not likely going to improve until crypto reaches mass adoption. 

The chasm is not something to joke about. Some might even go as far as to say that there is no money in streaming music, not just for small artists, but for *anyone*. After all, Spotify has not made a single dime since its founding in 2006. It was only in 2022 that they finally became profitable.

Where do royalties come from?

One may think that the trilemma might be resolved by killing the “ads” leg of the lemma - instead of putting ads onto the platform, you introduce royalties! You split the royalties three-way, between the platform, the artist, and fans / streams. This solves the lack of user stickiness on the platform, since users are then incentivised to onboard by the promise of passive income. 

But then the problem is of course, where on earth do these royalties come from? 

Royal.io for example, is a platform that:

 “enables anyone to own a piece of their favourite songs to earn royalties alongside the artist… Each token on Royal represents (i) a percentage of the royalties from streaming services, (ii) a license for non-commercial use of the digital art associated with the token, (iii) any additional perks that the artist chooses to include. [...] Artists choose what % of the song's royalties to put up for sale. They can also bundle fan experiences, special tracks, digital art - it's all up to them.  You can purchase these streaming royalties in the form of 'tokens', directly from the artist. Any extra bundled benefits will be attached to this token. Once you've bought a token, you can claim royalties for the song after they've accrued. The time to payout will vary depending on the artist. If you'd like, you can put your token up for sale on an NFT exchange. When someone else buys this token, they'll get all the royalties and additional benefits that come with it.”

Ok that’s all well and fine, but where do the royalties come from? Let us dive deeper: 

“As a song is streamed, it accrues royalties across the various streaming platforms - Spotify, Apple Music, Youtube, etc. Although the song accrues royalties whenever it's streamed, the artist receives their royalties payouts in aggregate for a given period of time. The frequency depends on the artist and their deals; sometimes it's once a quarter, sometimes twice a year, etc. Because every artist is different, royal token holders will get paid out based on when their artist is paid.” 

So it’s turtles all the way down… Web3 piggybacking on Web2… And that’s not the most damning thing… the fact is that in such a model, creators have the lion’s share of their income first taxed by Web2 platforms like Spotify et al, and then they get another cut taken away from them on the Web3 level… Doesn’t sound terribly attractive to a creator does it?

Gatedness

One thing remarkable and probably done right by Audius is what I call “gatedness”. The Audius project encrypts audio, and “artists can tie the ability to unlock any piece of content to any condition they choose” - upon payment, upon sufficient holding of an artist’s token, upon satisfactory past streaming behaviour (following an artist, streaming a sufficient number of times of an artist’s work, sufficient repost numbers, etc). 

The unlock conditions are immaterial and can be designed to a protocol’s or an artist’s liking. The important thing is that the content is encrypted and rendered inaccessible, unviewable, unconsummable, unless some condition is met. 

As everyone familiar with OpenSea is aware, your JPEG is naked, exposed, for all the world to see. Its metadata is fully public. Hence the “right click and save” meme. 

I would like to believe I have already spent a reasonable number of hours mulling how we could enable income for artists while maintaining this open garden approach where all metadata, and therefore content, is open for all to see. Alas, I simply cannot conceptualise any long-term, viable, sustainable model. I cannot find myself convinced in the economics of Open Access, even though I have no doubt in the good and beauty it would bring if it works. 

As Thomas Sowell put it, there is no economy in the Garden of Eden, where goods are supplied without cost, consumed without diminishment. The Garden of Eden is commercially sterile, for no one could sell anything. NFTs as they exist right now, are non-excludable and non-rivalrous, that is, people can't be barred access, and one person's use doesn't degrade another's - that is, they exist like public goods, like clean air. But clean air isn’t like the Roman public baths, which are also a public good, in that clean air doesn’t require monetary input to produce, whereas Roman public baths require public money. It is clearly the case that music requires money to produce. It exists as a public good, by technological design (or under-design), but it is not free.

One can perhaps go down the rabbit hole and say piracy is therefore the necessary evil to counterbalance the inevitable diminished utility that society suffers from the inflexible operation of gatedness, which is also itself a necessary evil lest we be left with no economy. But we shan’t go there. I might be wrong, and I shall be delighted to be educated. The essay Positive Sum Worlds: Remaking Public Goods gives a good analysis of the nature and properties of public goods, but how to maintain their production and their free access remain an unsolved problem.

The point is, if artists are to live, then they must have income. And without gatedness, they cannot have sustainable income. 

Gatedness is necessary because royalties collected based on transaction volume cannot sustain a viable income stream for artists in the long run. Aside from that, at the moment, income from music NFTs for artists only come in the form of the initial sale, which is, uncomfortable as it is to hear, based on irrational and idiotic hype, where the fair value is fundamentally propped up by phony utility and indistinct guesswork about future “historical value”. Everyone is launching, and only very few people can do a Wu Tang Clan. So as hype for new drops dies down, artist income must rely on royalties - or anything that is sustainable. But royalties so far are derived from transaction volume - but why would there be volume? Why would people buy and sell as if they have nothing else better to do with their gas fees? 

In fact we don’t even need to answer those questions. The fact is that any platform that can generate revenue using gatedness strictly dominates over another other platform, ceteris paribus. 

One of the more mature infrastructure enabling gatedness is the Lit Protocol. The Lit protocol SDK encrypts your content, and uploads your conditions for decryption to each Lit Protocol node. When someone wants to access the content, the SDK will request a message signature from the user's wallet that proves that they own the NFT associated with the content to each Lit Protocol node. The Lit Protocol nodes will then send down the decryption shares and the SDK will combine them and decrypt the content. 

DeFi on top of Music 

With that, you only need to think through what the access conditions are for the piece of music to be monetised - or rather, what is your monetisation model. Here, I offer some models.

1. Artist A takes a piece of music, and makes it into a Master NFT. The musician DOES NOT sell the Master NFT. She programmes the access conditions to be such that only those who have sent 0.01 ETH into the contract in the past month can access the content.  Payment history could be represented by a non-tradeable receipt token.There is no limit as to how many people can access the content. 

2. Artist B makes the Master, in which access is conditional on possessing an access NFT. She makes 5 access NFTs. She does not sell the master, but sells all 5 access NFTs. Every trade of the access NFTs results in a royalty transferred back to the Master. 

3. Artist C makes no master, but instead makes 1 million NFTs of the same song. The song could not be accessed unless you own one of those one million NFTs. She sells all of them. Every trade of the access NFTs results in a royalty sent to the contract from which the 1 million NFTs are minted. The artist can call the withdraw() function (onlyOwner modified) to collect the royalties.
   

Obviously these are only examples and do not exhaust all possibilities. And indeed, I suspect under more careful scrutiny, one might find these models to be more isomorphic to each other than it looks at face value. Still, I shall briefly comment why I think they might be different. 

Artist A does not collect any trade-dependent royalties, as there are no trades. The smart contract directly checks whether someone has a receipt token. Clearly, under this model, the subscription fees would be very small. The income stream of the subscription fees is not tokenised (yet), so the artist cannot sell the income stream (for an immediate lumpsum) without selling the entire master. 

Artist B earns by the initial sale of these NFTs and the collection of trade royalties from the trades of the access tokens. Obviously, the price of the access NFTs would be extremely high, since the supply is small and one can further use those NFTs to generate an income stream. One can imagine some aggregator streaming platform built, and start collecting a huge number of similar access NFTs, and then charge streamers a fixed fee to listen to the songs collected (this of course assumes the access NFT does not have any funny logic). Here, the income stream is tokenised through the access tokens, which are sold off. Artist B retains control to further build things on top of the master NFT. 

Artist C earns by the initial sale of the NFTs and subsequent trade royalties. Income stream is not tokenised. 

Several notes here. 

First, it is clear such models offer far more monetary and artistic sovereignty to artists.

Second, there is some kind of modularisation, separation of income streams, trade royalties, and artistic rights here. Gating makes this possible. Obviously this should smell Ve-nomical here, but let’s not let our imagination run too far.

Third, these models are enabling the open financialisation of music as an asset. 

Consider the case of Artist C and the 1 million NFTs. Why couldn’t people build another series of access tokens of which ownership would grant one access to the content whose access is granted by one of the 1 million original NFTs? Or rather, to put it in more intuitive and comprehensible language, the original 1 million NFTs are like the CDs of old. By making another access token on top of the original 1 million, it is like buying a CD, and then selling copies out of it. It should hearken back to the days before online streaming. 

This might of course sound very undesirable to the original artist, as it is value captured by someone else - and there might be some clever code logic that can prohibit this - but in the case that there isn’t, the issue simply dissolves into a problem of profit maximisation by optimising the initial number of NFT sales, sales price, and royalties percentage. It is not immediately clear what the obvious code logic would be. Indie artists might have different strategies from more established artists. 

The snag here might be that we might see a dreadful confusion of royalty implementations. This would prevent the kind of bloom of Music DeFi in the form of streaming and royalty aggregation platforms we would want to see.

Knowing all that, it becomes incredibly difficult to not be bullish on a project like Releap. 

And the discussion above has only touched on just streaming income generation possibilities. Music is of course licensed out in films, games, and we have not touched upon their income stream possibilities. Nor have we yet talked about how given these possibilities, crowdfunding and financing of the production of the Masters NFT, and the subsequent profit-sharing thereof, becomes wildly attractive. The Vuzec model offers some insight as to how infrastructure for artists to set up a liquidity pool where people can purchase tokens representing a fractional ownership of a song’s royalty income stream can be built. Once gating becomes widespread, the DeFiying of music would follow, and royalties will be on-chain and the turtles all the way down to Web2 problem will be resolved. 

Conclusion 

Music, is going to be the first type of cultural and artistic object to be financialised using crypto. There is a lot to be built, which means there are a lot of investment opportunities. Keep an eye out for projects and founders with the promise and potential to deliver that opportunity. Patrons of composers and performers during the Renaissance and the Romantic and Baroque did not make returns on the wonderful music their patronage produced, but with crypto, it will be possible, not just for a select group of individuals, but for everyone.