challenges for music NFTs

July 2022

I’ve written previously on why I’m excited about the future of music NFTs and how they’re part of music’s unbundling in web3. Now, I want to muse on some challenges they face.

These are very much shower thoughts and need some refining. I’ll focus on three, but there are many more: getting the mainstream to care about owning music, improving the user experience, and the formation of artist economies.

For a general flavour of current problems, Cooper Turley has a great thread.

Challenge 1

NFTs are about ownership, so one of the biggest questions is: how much appetite is there to own music? Music NFTs are instruments representing ownership of an underlying audio file. At the moment, this means owning a link to the audio in a decentralised storage solution like IPFS or Arweave, as saving on-chain is too expensive. Artists can include ownership rights in the audio master licence to entitle the NFT holder to a share of royalty revenue beyond the raw collectable value.

In web2, listeners passively consume music - they pay a monthly streaming fee and get access to all the music in the world, but they can’t do anything else with it - they’re just “renting” the utility. NFT holders have true ownership because the token address is immutably tied to their identity on the blockchain, and they can sell in the secondary market. Tokenising music converts it into a digital asset that can be bought, sold, and exchanged.

Will NFTs go mainstream? You can look at the listening habits of web2 and determine “no.” Streaming platforms like Spotify and Apple Music have completely depersonalised music by abstracting individual songs and artists into faceless playlists. This has created a trend of many consumers just “listening to music,” with no awareness of or affinity for the artist in their ears. Indeed, I heard a worrying stat recently that the most popular request for Alexa devices is to “play some music.” Streaming platforms have aggregated and modularised music by bundling it in a single subscription, preventing artists from pricing their output. The listening experience for all music has been homogenised, and all artists receive roughly the same fixed fee per stream ($0.003-$0.01).  Since consumers are used to paying a single subscription fee for all music in the world, and they’re just casual fans of music generally, not loyal fans of particular artists, why would they buy music NFTs?

It’s possible music NFTs remain a niche “toy,” issued by a minority of artists and bought by a tiny subset of their superfan listeners, never entering the music mainstream. But, as Chris Dixon said, in his now canonical piece, the biggest innovations start out looking like toys. This is what we’re seeing with music NFTs. Currently, to outsiders, they look like a fringe product for extreme superfans. Over time, we’ll see more users become superfans and music NFTs get broader appeal beyond the superfan market.

Ownership is a powerful concept, and as more listeners realise the opportunities it brings for patronage and patronage+, they’ll embrace music NFTs. Chris Dixon also talks about how new blockspace coming online through L2 scaling solutions will stimulate induced demand from users by paving the way for cheap and accessible applications. The utility of music NFTs can have a similar inducing effect on demand. Sometimes we think about things the wrong way round: listeners need to be passionate about an artist and their music to buy NFTs. But this ignores the power of disruptive innovation. Maybe, the benefits of music NFTs can turn otherwise ambivalent music listeners into artist superfans. It’s not dissimilar to Carl Newport’s argument about finding a fulfilling career: trying to “follow” your passion leads to dead ends; instead, we should follow areas where we can master skills, and then passion flows from that.

Alex Danco talks about commerce requiring a challenge to activate latent consumer demand to purchase a product. (For those interested, I explored this more in Shopify and Tokengated Commerce.) NFTs can be a trigger that converts casual fans of music, in the most general sense, to superfans of a particular artist. Why? Well, music NFTs introduce new incentives for superfandom based on scarcity. As we all know, no discussion of incentives is complete without dropping some Charlie Munger, so here goes: “show me the incentive and I’ll show you the outcome.”

Let’s go deeper into these incentives. As alluded to above, they fall in two buckets: patronage and patronage+.

Music NFTs are a new way of providing patronage to artists. The relationship between artists and NFT holders is much closer than between artists and web2 listeners. Artists have no idea who their biggest fans are on streaming platforms - all they get is their aggregate listening numbers - and outside of platforms like Patreon, fans don’t get anything back for being loyal supporters (these two things are linked).

With NFTs, ownership is tracked on the blockchain so artists can instantly see who their collectors are and communicate with them directly.

We’re already seeing artists forming communities with their holders, setting up exclusive Discord and Telegram groups, and giving them perks. Whereas in web2, the artist-listener relationship is completely unidirectional, with artists broadcasting music and nothing coming back the other way, music NFTs enable multidirectional networks for listeners to connect with artists and each other. We’re social creatures that crave connection. Nothing has more emotional weight than music, so with music NFTs seeding new networks around artists, this will encourage casual listeners to find artists and communities they resonate with and purchase those NFTs. Passive consumption will turn into active discovery and participation. I know this sounds quite ambitious, but our human impulses for connection, community, and depth will push us this way.

Patronage+ is a new opportunity created by NFTs. The “+” is the ability to earn a profit from supporting a creator. Music NFTs have two potential sources of financial upside: appreciation in the token value and access to cash flows (if the artist chooses to include them in the NFT).

Music NFTs have an initial price paid by the collector, then can be sold on the secondary market. The collectable value of music NFTs is driven by the cultural value of the underlying audio: the more eminent a piece of music, the more valuable it is to own. Because of the resale opportunity, collectors can invest in artists they like and benefit financially from their music becoming more popular.

The other thread of patronage+ is access to royalties (and other cash flows) from the underlying audio. Music is unique among cultural assets because it generates repeatable cash flows through royalties. Historically, these cash flows have only accrued to record labels and sophisticated investors, but music NFTs open the way for ordinary collectors. Artists can bake a share of royalty income into the NFT smart contract, making them an investment asset.

This will help convert casual listeners to superfans. NFT holders will have skin in the game of artists’ success: the more streams the artist gets, the more revenue flows to NFT holders - so they’re incentivised to champion and evangelise the artist. I recently went to a Kings of Leon gig. I love them, but afterwards, I found myself playing their tracks even more than usual. Music NFTs will amplify this: casual listeners will buy music NFTs for the patronage reasons described above and as potential investments, and they’ll become superfans in the process. Skin in the game will create passion if it doesn’t already exist.

Outside of their core utility, the other way music NFTs will activate artist superfandom is through the purchase dynamics. Restricted supply of editions and especially 1/1s (obviously!), combined with auction structures (vs. fixed listings) for the initial sale, along with limited liquidity in the secondary market, create scarcity and competition, which turn buying an NFT into a challenge for listeners to “solve.” This is another chalk and cheese comparison with web2, where access to music is effortless. By introducing a challenge, music NFTs make music discovery and consumption more enjoyable.

We’ve focused wholly on the challenge of listeners wanting to own music. Of course, on the other side of the equation, artists have to want to give listeners ownership of their music. Generally, this is a sure bet. The benefits to artists of tokenising their music are significant: access to creative capital without relying on record labels, an alternative monetisation mechanism away from streaming platforms, a greater share of the economics from their music, and the ability to foster direct connection with their listeners. The biggest barrier to getting artists on board is articulating what they have to gain. If done right, most grok it instantly.

To sum up: there are question marks over how much consumers care about owning music and the possibility it only appeals to a small group of superfans. Web2 streaming has created a class of casual music listeners, but music NFTs will reverse this by introducing new incentives for superfandom, on top of opening the door for general speculators looking to profit from music ownership.

Challenge 2

The second challenge for music NFTs is improving the user experience to make discovery and consumption easier. Discovering music NFTs is more difficult than other cultural assets because, by definition, the value is in the tokenised audio and isn’t immediately recognisable like artwork. Users need to listen to music to figure out if they like it, and this creates significant friction. There’s lots of work to do to make discovery easier and more seamless. Listeners are used to the structured organisation of Spotify with browsable genres, curated playlists (like the classic “Discover Weekly”), personalised mixes, and recommendations.

Currently, music NFT platforms are missing these bells and whistles. You have to search through all music on the platform, click on the ones that interest you, and listen to the tracks. For an early adopter, this is exciting: much of the thrill is in foraging through the abundance of music to find one you want to pick up. But to attract mainstream audiences, new mechanisms will need to be built to make discovery silky smooth. Likely, these platforms will need to incorporate the same curation algorithms that power the web2 streaming platforms for a more tailored and personalised collector experience based on genre preferences, listening history, or previous purchases.

One of the most exciting aspects of music NFTs is the ability of music curators to profit from their craft. In web2, the most anyone gets from discovering and helping to popularise an artist early is bragging rights. With music NFTs, they can ride the price appreciation in the token, so we’re likely to see tooling emerge for users to find music through curators. Right now, this is a very manual exercise as you need to find out who the big collectors are and go to their profiles on each of the individual platforms.

You could say the shortcomings with web3 music leave a foothold for the web2 streaming platforms to continue to own music discovery (and perhaps ownership if they include NFT functionality) because they already have the infrastructure and some network effects. I don’t think this will happen because of two forces: composability and interoperability.

Web2 platforms will never be able to compete with web3 native counterparts on these axes. Blockchains are built with open code, so anyone can take the code of web3 music protocols and applications and reuse or remix it to build something new. Web2 platforms are walled gardens based on proprietary code, whereas web3 music platforms are decentralised systems made with lego blocks. Because they’re composable, the elements of one web3 music platform could be plugged into other platforms, creating a symbiotic ecosystem that works together. Users win because they’re not trapped in products and can take their tokens and data between different platforms with minimal exit costs.

Consumption of music NFTs is currently limited. It’s far off the one-click listening experience of web2 streaming platforms. With Spotify, users can instantly switch between discovery and consumption by saving music to their “Liked Songs” or personal playlists. There’s also a host of social features like instantly shareable links for sending music to friends or posting on social apps; public playlists; Blend, which merges the most-listened-to songs of two users in a shared playlist just for them; Wrapped, summarising the user’s listening habits over the year for sharing; and upcoming Community that will allow mobile users to see their friends’ streaming and playlist updates in real-time, building on “Friend Activity” in desktop.

Music NFT platforms still have a lot of work to do here. When you buy a music NFT, it sits in your wallet, but (from my experience to date) it’s difficult to play it natively, and there are no easy ways to show it off. One example of what’s to come is Audius, a web3 streaming platform, releasing auto-generated music NFT playlists for Ethereum and Solana.

There’s a rich opportunity for music NFT platforms to build out strong consumption and social layers. Buying an NFT is often an expression of identity, and collectors want to display that identity and connect with others in the same community - that’s why NFT PFPs exploded on Twitter. Because of composability and interoperability, the consumption and social experiences can be built on top of the collecting platforms by third-party developers. It makes sense to have a platform-agnostic consumption and social layer that plugs into all the music NFT platforms and hosts all collectables in one place.

Challenge 3

The final challenge is more abstract and longer-term: the formation of artist economies underpinned by music NFTs. Bear with me here. We’re still super early in the journey, so much of this will be speculating how things might play out.

What do we mean by artist economies? Essentially: an artist DAO, backed by NFTs and organised through community-distributed social tokens.

All the artist’s assets (music, merchandise, tickets etc.) could be tokenised and held by the DAO treasury, and members will be able to join the DAO by purchasing their social token. The social tokens will give holders a share of primary and secondary sales of the treasury NFTs (for secondary, this would be deducted from the artist’s stake, not the NFT holders) and a voice in creative and “business” decisions (such as, whether to release a certain song or where to tour) through governance votes.

DAOs will be the basis for artist economies as they’ll have a market value based on the trading price of the tokens, which will be a proxy for the artist’s value. Token holders will have a stake in the artist business just as equity holders have a stake in the success of a corporation. Anyone will be able to speculate on the artist by purchasing their token in the secondary market.

At first, this might sound crude: artists being completely financialised. The fact is that artists are already businesses, but the formation of artist economies, with DAOs and NFTs, will democratise access to investing in them. Music will become an investable asset class for everyone, not just record labels and institutions with capital war chests. One of the trickle-down effects of this could be a transition from the creator economy we’re in now to a community economy where artists and fans are building and sharing in the upside together, commensurate with their contributions, and the line between them gets increasingly blurred. We’ll go from top-down artists beaming out content to a flatter dynamic where they’re building a community alongside their fans.

What benefits might this bring? First, DAOs can be a Schelling point for the artist’s community and a magnet that draws in more people to collect their NFTs. Second, social tokens can be a single instrument giving holders exposure to multiple of the artist’s tokenised assets. Artists will be able to choose which of their NFTs are captured by the social token.

As Cooper Turley suggests, with the evolution of artist economies, artists will be focused on new metrics. Rather than plays or monthly listeners, they’ll be ranked on floor price, trading volume, unique holders, and treasury balance. This might be quite jarring, but it's just a product of the technology that we’re moving to. I don’t think artists will focus exclusively on these new metrics - ultimately, they want their music to be heard and recognised by as many people as possible, so distribution, measured by plays and unique listeners, will still be important. But as the monetisation mechanisms move from streaming to NFTs and social tokens, the metrics associated with these will inevitably become more of a focus for artists. Cooper posits we’ll see curated “stock exchanges'' of artists who meet certain criteria, and users will be able to purchase their tokens. Think of it like artist indexes, analogous to what we have in financial markets today.

The transition to micro-economies will be challenging for artists. Running a DAO entails lots of operational work that takes away from artists’ creative time producing music. Many artists want to focus solely on music and not get bogged down in “business stuff.” The obvious solution to this is hiring and delegating. It’s unlikely artists will establish DAOs straight out of the block - it’ll be a gradual transition - so they can use some capital from NFT sales to fund it. That said, even if the artist isn’t doing the operational heavy lifting of DAO management, they’ll still be the face of the DAO, and this might be a little scary. With people investing their money into the artist by buying their tokens, artists could be distracted by the pressure of growing (or, at least, maintaining) their token price. It’s similar to public company CEOs, who are constantly judged by their stock price.

We’ve already seen early pioneers of artist economies. RAC was the first artist to create a social token. In 2020, he launched $RAC and distributed it retroactively to his existing supporters. Fans can only earn $RAC as a reward for their continued support. In return, they receive perks and exclusive content.

Daniel Allan was the first artist to create a DAO via a 50 ETH crowdfund for his Overstimulated EP at the end of 2021. Collectors bought a range of NFTs and received $OVERSTIM tokens (there was also an option to purchase them directly) at a rate of 100 $OVERSTIM per 0.1 ETH. 50% of the OVERSTIM supply went to the community, with the other 50% retained by the DAO. The Overstimulated DAO treasury accrues all the artist streaming royalties from the Overstimulated EP and 50% of the artist’s share of NFT sales (primary and secondary). These cash flows are paid out pro rata to $OVERSTIM holders based on their share of the supply. The Overstimulated DAO has different tiers: general admission to the Discord for anyone, OVERSTIM holders for those with more than 5 $OVERSTIM tokens, and Overstimulants for people holding any Daniel Allan 1/1 NFT. Daniel did a follow-up airdrop of $OVERSTIM tokens to all his collectors in January 2022. Recently, he worked with $OVERSTIM holders on a new Glass House EP, released in July by selling 1000 music NFTs.

Daniel has paved the way for other artists to follow. As one example, alternative hip-hop artist Ibn Inglor raised 20 ETH through a Mirror crowdfund in 2021 to fund his Danger Zone DAO and EP release.

This trend will continue as more artists look to own and better monetise their community.

End

NFTs are the new frontier in music, and they’re poised to revolutionise the industry.

At the time of writing, the music NFT community is still incredibly small. Just from my own experience over the last month, I see the same faces in listening parties and NFT order books. It’s trite to say in web3, but true for music NFTs especially: we’re still super early.

Challenges await, but the future looks bright for a world where artists and listeners can have deeper connections and capture more value.