Beyond rights: How blockchain is underpinning a new generation of artist tools

Remember blockchain?

If you work in the music business, there’s a good chance you haven’t heard that word more than a handful of times in the past year. I don’t blame you, as the phase of blockchain hype is largely past us: According to Google Trends, worldwide search interest in blockchain music applications began rising around early 2016, peaked in early 2018 and has been on a steady decline ever since.

Of course, blockchain music companies are still around, but the news has been rather scattered in the past 12 months and have revolved either around servicing incumbent players and ecosystems (e.g. Warner Music Group investing in Dapper Labs, Paperchain using blockchain to advance streaming royalties to artists and labels), or about trying, and often failing, to build streaming experiences that compete with the dominant players like Spotify (e.g. Choon shutting down, Audius raising a $3.1 million funding round).

Today, I want to focus on a new kind of blockchain-driven music experience that is emerging, powered by a new generation of startups like Cent, Foundation and Zora that are allowing artists to control the markets around their creative works. These markets allow artists to engineer digital scarcity around their music and earn money off of secondary market transactions, all while cultivating direct relationships with their most loyal fans and evangelists in the process.

While still in their early stages, these newer companies are worth examining in the context of the COVID-19 pandemic — which has wreaked havoc on the music industry at large, and has forced many artists and other stakeholders to reexamine the business standards and conventions that they previously took for granted. Cryptocurrency and blockchain tech can become powerful tools for artists to experiment with new kinds of market forces and fan behaviors around music, in a way that — contrary to industry belief around 2015–2020 — does not have to be tethered to the political bureaucracy of rights management.

To lay the foundation for why now is a good time to revisit blockchain in music, I’m going to divide this story into three sections:

1. Why the first iteration of blockchain-powered music products didn’t work
2. The ideological foundations of blockchain’s enduring relevance in music, with a focus on the artist’s perspective
3. What early iterations of the next generation of blockchain-powered tools for artists can look like, including case studies Foundation, Zora and Cent

If you’re not interested in reading through the lengthy context below, you can skip straight to section 3. 🙂

1. Why the first iteration of blockchain-powered music products didn’t work

A. Over-reliance on enterprise adoption

A lot of the initial hype around blockchain in the music industry revolved around enterprise adoption of “smart contracts” for rights administration. The endpoint in this vision was a decentralized, verifiable source of truth about rights ownership for global music catalogs, which could alleviate the bureaucratic pains that artists faced in getting properly credited and paid.

This was bound to fail from the start. For one, as I’ve covered in the past, “smart contracts” for music are only as “smart” as the provenance and identity data that rights holders feed them. The music business already has a vast swath of problems with metadata and payment inaccuracies today, which they can and need to solve before blockchain can be useful for them. Moreover, getting incumbent, competitive players to agree to share rights data among each other is an uphill political battle that no one has successfully surmounted yet.

“Enterprise adoption as the go-to-market strategy for a startup in any new tech category is always a bad idea,” Jesse Walden, founder of Variant, an early-stage venture fund focused on crypto, blockchain and other “ownership economies,” tells me. “For music, it wasn’t a tech problem; it was a coordination problem of getting people at the top to agree to share data in an interoperable way.”

If you’ve worked in music and tech for a while, you may recognize Walden’s name: He also founded Mediachain Labs, a blockchain-driven media attribution startup that Spotify acquired in 2017. At the time, the acquisition was heralded as a potential boon for rights management and streaming payouts to major music rights holders, especially considering that Spotify had settled a licensing dispute with the National Music Publishers Association for over $25 million a year prior.

But Walden, who previously managed artists like Solange Knowles and Dev Hynes, lasted only nine months at Spotify. “With Mediachain, I actually wanted to avoid the music industry entirely — we were more focused on images,” he says. “Spotify saw a use case for the tech we built, and they were in the dominant seat to drive a new tech standard. But my intuition about music was correct: [Our plans] got mired in incumbent politics. I was up against this wall of the industry not adopting the tech, and I wanted to be back on the forefront of what developers were doing.”

Today, blockchain-powered music rights management startups either have shut down, are largely silent or are quietly building out their technology with little to mention of the word “blockchain” in sight. One major exception is ConsenSys, which, along with Harry Fox Agency, is the official technology partner for building out a central database of music rights as part of the Music Modernization Act in the U.S.

B. User experience

Aside from the behind-the-scenes challenges in rallying together incumbent music-industry players around a new technology, there was also the front-end challenge of getting the user experience right.

This problem was not unique to music: Commentators in other industries were reporting that it took several dozen steps just to sign up for blockchain-powered media applications, like the now-defunct Civil.

Ujo Music — a subsidiary of ConsenSys that worked with artists like Imogen Heap and RAC on blockchain-powered music releases in the mid- to late 2010s — faced similar challenges early on. Not only was there a high barrier to signing up and obtaining the cryptocurrency necessary to make music purchases on the site, but the end result was just downloading MP3 files, which were certainly not immutable and could be changed freely by the end user, rendering the use of blockchain tech largely irrelevant.

“I still love some of the early talking points around fans supporting artists directly, staking coins as a reputational thing and keeping people accountable with payments, but it felt at the time like we were building all this stuff for a market that didn’t exist,” André Allen Anjos (i.e. RAC), who was an Artist-in-Residence at Ujo for 1.5 years, tells me. “For the most part, people don’t care — they’re going to go wherever is most convenient for them, like Spotify or Apple Music, because it’s an amazing consumer experience. Can you imagine taking 40 steps just to sign up to Spotify?”

Today, the user experience around certain blockchain applications is much easier than before, with exchanges like Coinbase and Binance allowing anyone with a bank account to buy, sell and trade cryptocurrencies within minutes. In addition, today’s blockchain developers and investors are focused on leveraging the unique functionality of the tech to enable new kinds of experiences that wouldn’t otherwise be possible — instead of, say, using crypto just to download music files.

“Part of the value of blockchain comes from creating emergent behavior,” Simon de la Rouviere, a blockchain advisor and co-founder of Ujo Music, tells me. For instance, in the visual art world, “people are taking digital, moving artworks they bought from SuperRare and displaying it in their VR gallery space in Cryptovoxels. Blockchain makes this much easier to happen over a weekend hackathon-like event, whereas to do something like selling moving pictures as paintings in your own gallery would be much harder in analog space.”

2. The ideological foundation for blockchain’s enduring relevance to music

In short, blockchain applications in music have fallen short in recent history because of a clunky experience for end users and a political minefield among major rights holders.

But the ideological inspirations behind the next generation of blockchain-driven artist tools and music marketplaces are alive and well. There are three main pillars in particular that have gained ground this year:

A. Artists capturing more value from stock markets and secondary markets

In general, while stock markets take up ample space in business headlines, their underlying forces are actually quite detached from the day-to-day realities of most people’s lives.

The COVID-19 pandemic could not have made this more obvious. The Dow Jones Industrial Average has soared by over 10,000 points over the past five months, even though “tens of thousands of Americans were dying of Covid-19 and millions were losing their jobs as a consequence of the nation’s economic shutdown,” in the words of journalist Michael Steinberger.

This is because, in Steinberg’s words, “the sector of the economy being hit hardest by the crisis, the small-business community, was not represented in major stock indexes like the Dow and the S&P 500.” In fact, many of the most valuable public companies, including big-tech firms Amazon, Apple and Google, were actually positioned to benefit from pandemic-induced shifts in work and life.

Music is no exception: The likes of Spotify and Warner Music Group are now publicly traded, and have helped pave the way for more entertainment IPOs in the next few years. Yet the artists whose catalogs make these music companies so attractive to investors are largely left out of capturing this value.

Another version of this challenge is the immense, multibillion-dollar value generated by secondary markets for concert tickets (e.g. StubHub), vinyl records (e.g. Discogs) and fashion (e.g. StockX) that artists normally cannot participate in directly. “In a lot of these cases, artists generate value that they have no ability to touch,” Kayvon Tehranian, founder/CEO of Foundation, tells me. “Then what happens is that a lot of players come in who understand how these dynamics work, and they become borderline extractive, because they’re not creating that culture.”

Unlike stock markets, however, a lot of the secondary ticketing platforms and brokers that thrived off the live events industry in previous years are struggling to make ends meet today — potentially opening up an opportunity to build new kinds of models around secondary transactions for physical and digital goods in a way that compensates the original creators more fairly.

B. Artists experimenting with models of digital scarcity

As I argued previously, the eradication of live events in the wake of the COVID-19 pandemic induced a career whiplash for many artists, whereby they were forced to transition from a low-volume, high-margin model of physical scarcity (i.e. touring) to a high-volume, low-margin model of digital ubiquity (i.e. on-demand audio streaming and mostly free livestreaming).

While still emerging, models for digitally scarce goods and experiences can help close this value gap for musicians in the long term. In fact, music is actually behind other industries when it comes to embracing digital scarcity. Blockchain-powered marketplaces for digital art, like SuperRare and MakersPlace, already abound; in fashion, The Fabricant’s 100% digital Iridescence dress sold for nearly $10,000 on the Ethereum blockchain. Video games have been proving market demand for digital goods for years, generating billions of dollars in revenue from sales of in-game skins, weapons and other add-ons, with no blockchain involved (yet).

C. Artists offering reputational goods and enabling fan ownership

More and more musicians are also experimenting with alternative financing models that allow fans to take ownership in artists’ careers and creative projects, thereby incentivizing them to serve as ambassadors and evangelists within their social networks (e.g. Corite and Riteband). This funding mechanism is also becoming normalized with other cultural goods such as trading cards and fine art, which in the finance world are known as “passion assets.”

In incentivizing fan evangelism, these open funding models also have a reputational benefit for fans, in the same way that band merch or chat badges on Twitch and YouTube do. “Why do people buy band T-shirts? Maybe because of the design, but most times bands are skimping on quality,” says Anjos. “It’s more about being seen with the shirt. Maybe that’s the angle to introduce digital scarcity and blockchain into a more common and mainstream application.”

These ideas align well with crypto networks like Bitcoin and Ethereum, as they represent fans and customers taking more ownership over the media they consume, while treating that ownership stake as a mark of cachet and inclusion in a tight-knit community.

The new wave of blockchain tools for artists: Three case studies

A. Foundation

Foundation, which describes itself as “culture’s stock exchange,” is a platform enabling anyone to buy and sell limited-edition goods from a wide range of artists, including but not limited to musicians, fashion designers, architects and visual artists. Each good is represented by a unique token that users can buy and sell on a secondary market; artists get a share of every secondary transaction that takes place, “allowing them to capitalize on the hype they create,” per Foundation’s website.

One of Foundation’s most recent project launches is a limited-edition vinyl drop from the electronic artist PLS&TY for his EP Very Special. Only 30 copies of the vinyl are available for purchase, and fans can either preorder the record directly using a credit card, or use the cryptocurrency Dai to buy a token called $PECIAL that represents the physical product and can be traded on a dynamic secondary market. If the latter, the token can be redeemed later for the physical product, at which point the token is removed from the market entirely.

As of publishing this piece, the price of a “Very Special” vinyl — and, in turn, of a $PECIAL token — has soared over 2x due to demand, from the initial starting price of $50 to $113.41. According to Foundation’s business model, PLS&TY receives 3% of buys and 1.5% of sells of their $PECIAL tokens on the crypto market. Foundation gets a 1.5% cut for every sell, and then a 5% cut every time a token is redeemed for its corresponding physical good. (Anyone can track price changes and individual transactions for any token on Foundation on a separate site called Terminal, which describes itself as “culture’s Bloomberg terminal.”)

“Most of our musical projects are looking to replace the traditional merchandising experience,” Tehranian tells me. “Artists are still releasing albums now, but have no way of touring or giving fans exclusive items at concerts in person. We can be a virtual merchandising venue and create the same sense of scarcity via tokens for vinyl drops, custom bomber jackets and other items. All the creativity that normally goes into planning a tour is now being channeled into Foundation.”

B. Zora

Zora operates quite similarly to Foundation: Artists can drop limited-edition items onto Zora’s marketplace, and allow fans either to pre-order an item with a credit card or to buy dynamically priced tokens representing the item to trade on the secondary crypto market. The main difference is the underlying business model: Zora charges the end user a 1% fee on secondary trades, and takes a 10% cut of creators’ total generated revenues from a given drop.

RAC, who is an investor in Zora, was also one of the platform’s first customers. On May 11, the artist dropped a limited-edition cassette tape of his latest album BOY, with a cap of 100 units and a starting price of $20.

Within a few days, the $BOY token peaked at $950, and has since decreased to around $240 — which is still 12x higher than the original starting price. RAC tells me he gets a 0.3% fee on every secondary trade of $BOY.

“I thought it would be fascinating to apply a market dynamic to this [product], because I had no idea what it was worth,” said Anjos. “I anticipated the $50 to $60 range, but didn’t expect it to go all the way up to the $950 range. There was some speculative frenzy at the beginning, but the market has leveled out and decided on a price in the middle. I at least wanted to start a conversation around music’s value and force people to ask themselves, ‘What is music worth to me?’”

3. Cent

Cent is quite different from Foundation and Zora in that it’s not a marketplace for discrete physical or digital goods, but can have a similar long-term impact in terms of enabling new kinds of behaviors and incentives around online fan engagement.

Think of it as a combination of Patreon and Facebook with deeper, more thoughtful financial incentives. Fans can “seed” a given creator by contributing monthly funds to support their work — a standard membership model. But fans can also receive incremental backend compensation for each additional fan who seeds the same creator afterwards, which incentivizes both evangelism and early adoption. (The exact breakdown for an individual seed is that 47.5% will go to the creator, 47.5% will be divided among all previous seeders and 5% will go to the Cent platform.) An artist’s fans or “seeders” are also ranked by how much money they contribute in absolute dollars, how soon they contribute relative to other fans and how many consecutive months they contribute over time.

Cent also features a social feed with two-directional financial incentives. Namely, fans can reward cryptocurrency to their favorite posts from creators in the form of “Spots” (the behavioral equivalent of likes), or creators can run contests that reward a certain number of Spots to the fan who responds to a post with the best or most thoughtful comment.

As a closing note: You’ll notice that none of the above case studies of blockchain tools for artists focus on rights. This is intentional, as trying to use new technology to solve the incredibly complex music rights debacle from the inside has not yet proven to be successful. Instead, some investors think building markets outside the incumbent music-industry ecosystem could still lead to the same result, while giving individual artists more wiggle room to experiment in the short term.

“One of my key lessons in going from Mediachain to general crypto investing is that markets drive standards,” says Walden. “It may be the case that we arrive at a global rights database not by incumbents coordinating on a solution, but by creators adopting a new kind of marketplace that allows them to earn money in new ways. The byproduct of that may be that you have this universal, tokenized media library of all the world’s songs.”