Can NFTs Crack Royalties And Give More Value To Artists?
Music is part of my monthly budget. Pre-pandemic this included live music, some vinyls on the side, not to mention subscriptions to the streaming platforms. During the pandemic it’s been Bandcamp Fridays, NFTs, and monthly donations through Patreon to support the venues and communities that are the soul of New York City — that comprise my own soul. Music was a comfort in an otherwise difficult year; it’s a cruel irony that artists have captured so little of the value they create.
When we clear the woods, I have no doubt that some venues will be back, some won’t be so lucky. People will always make music, as we have since before there’s been language. Yet it is not hard to meet an artist today who has a bleak view on the future of music streaming technology. Streaming platforms irrevocably changed the way music gets discovered, shared, and importantly for the artists themselves, how they’re compensated. As Mat Dryhurst said, Bandcamp feels more like a bandaid.
Ownership for the Internet
So where do we go from here? It begins with how you own things on the internet. Technology made it possible to compress the infinite miracle of sound waves into bytes. These bytes are reproducible and borderless, flowing alongside the information we consume in our hands. The crypto movement is challenging this notion — that something as ephemeral or as easily portable as a file can also be owned, and that this ownership is valuable.
Take the electronic musician Jacques Greene, for example. “Another Girl,” his track from 2011 has 7 million plays on Spotify, netting him about $27,904 in royalties from the platform. Last week, he sold a mesmerizing audio loop and GIF of a stippled figure called “Promise” for 13ETH ($16,037.32 USD). Let that settle for a moment. A six second AV loop bid upon for 24 hours brought in almost half the royalties of a song that people around the world may have played as they walk to work, cook dinner, party with friends, on a first date — over the course of a decade.
If you can bear the crypto jargon for a moment, the concept that led us here is important to explain briefly. Four Ethereum developers in 2018 authored the ERC-721 token standard, more commonly called Non-fungible Tokens, or NFTs. NFTs are provably scarce digital items, whether that be digital collectibles, tickets to an event, in-game items, or the digital art from Beeple that is now selling $6.6 million.
So why not apply this to music? After all, the ownership data on Ethereum is what’s important. Couldn’t a song’s metadata (which could be the audio file itself, the rights, or even midi stems) also be cryptographically transformed into its constituent parts, and royalties paid out to the owner of this metadata? In 2016, artists like Imogen Heap attempted this on pioneering platforms like Ujo Music, despite the limited capabilities of Ethereum smart contracts in those early stages, not to mention the added friction for actually using Ethereum. Also missing was an efficient way to pay out royalties for sales on secondary markets.
Smart contract standards remain the locus for innovation on Ethereum, and continues to bring in more and more individuals attempting to program value and contracts in new ways on the internet. The ERC-721 standard that led to the booming market of NFTs is now being revised to allow for a more dynamic standard for paying out royalties, no matter the platform that mints the NFT.
What does Euler’s Phi Function Have to Do with Music?
Two weeks ago, Treum, a ConsenSys Mesh portfolio company, created a project called EulerBeats, which is 27 algorithmically generated art and music NFTs. The name is a nod to the 18th century mathematician’s totient function phi, and if theoretical mathematics isn’t your thing, think of it as a function for pricing every subsequent print. As the number of prints in circulation grows for a particular original, the price of issuing its next print increases at an exponential rate. These NFTs use a modification of the ERC-721, called the ERC-1155. This means that with every future sale, the original LP holder gets a royalty of 8%, with another 2% going to Treum. In two weeks, the smart contracts governing the unique LPs paid out 912 ETH ($1,429,012) in royalties, automatically.
Unlike other NFTs where the metadata is hosted on a centralized web server, the metadata of the music and image is contained within the token implementation itself. This is important: if the EulerBeats website were to ever shut down, you would still be able run the art and beat generator script, stored on the Ethereum chain in perpetuity.
The Ethereum community ended up speculating on the value of this proposition to the price of 300 ETH for the first LP, with Mark Cuban calling it “the most genius idea ever.” There are many aspects of this project worthy of lengthy discussion, but for the purpose of this article, the implications of storing a verifiably unique piece of audio on Ethereum, where future sales are automatically paid out to the original owner, is the point that matters for new models for selling music.
Don’t other NFTs pay out royalties?
Not necessarily. Right now, most NFTs are minted as ERC-721 tokens, which means that when an artist initially sells their work to a buyer, that will be the only time they receive money for the sale. If the buyer then flips it on a secondary market like OpenSea for 5 times the price, the original artist sees none of that.
Zora is a new NFT platform for creators of all types attempting to change this. Each artist that mints NFTs on the platform can set a “creator share” which is a percentage that they will receive for all future sales. Let’s say their creator share is 10%. If the original is sold for 0.5 ETH, and then someone later sells that for 10 ETH, the creator would receive an additional 1 ETH for the secondary sale. Also, because these creator shares are automatically paid out with smart contracts, and auditable on Ethereum, the creator never has to worry about tracking them down: they just get paid in perpetuity to their original Ethereum address that they minted the NFT with. This is a powerful concept akin to royalties in the music world, but automatic and auditable.
An improved standard for NFT royalties
There is one problem, though. Currently the method that Zora uses for paying creator shares is not reproducible on secondary markets. The creator share percentage is only paid out if the secondary sale also occurs on Zora.
Zach Burks and James Morgan authored an “Ethereum Improvement Proposal” or EIP-2981 to create an ERC-721 Royalty Standard. The main motivation of this is to create a modified NFT standard so that NFTs created, purchased, or sold on one marketplace still pay out royalties regardless of the next marketplace it is sold on. With this standard, it would be possible for the artist to set a royalty amount that can be paid to the creator on any marketplace that implements these tokens.
Back to our earlier example, if an artist were to mint an NFT on Zora, they would still be entitled to their creator share if the purchaser sold it on another marketplace. I expect that more marketplaces will begin adopting this standard, which is already backwards compatible with the dominant ERC-721 NFT standard. We could also see more record label Decentralized Autonomous Organizations (DAOs) that manage minting, and distribution of Audio NFTs through the existing streaming services, such as DAOrecords. Just this week RAC announced a new creative agency specializing in NFTs.
Cool, but how does this all work with traditional Performing Rights Organizations?
In the year 2021, enterprising artists have already begun tokenizing audio files and selling them to fans as NFTs. We are also getting closer to a more universal royalties standard for these NFTs. But how does this interact with the traditional and opaque world of performing rights organizations (PROs) and centralized royalties databases?
The short answer is that what’s happening on Ethereum still exists within its own ecosystem. Yet, this slowly appears to be changing — both as PROs modernize their rights management databases, and as more record labels begin learning about the power of NFTs for creating value for artists (I may be optimistic here).
ConsenSys was selected last year by the Mechanical Licensing Collective (MLC), with the Harry Fox Agency, to modernize music royalties data and payments over the next several years. The MLC portal, largely built by ConsenSys, launched in January and is still evolving. There are already roughly 48 million songs, and 9,400 music publishers on it, and they just inherited $424 million in unpaid royalties (“the so-called Black Box”). We believe that as more music publishers and PROs begin to get comfortable with the benefits of Ethereum-based NFTs, we will start to see a convergence of these worlds over the next year.
Until then, if you’re an artist, and you think the current royalty system is broken, it doesn’t hurt to download MetaMask, and begin exploring what other musicians are doing in the NFT space.
This post first appeared in The Defiant.