The state of music NFTs and social tokens: An emerging, multimillion-dollar fan economy

By: Cherie Hu

Published: 2021-01-13

Editor’s note: Over $70 million in new music NFT sales have been made since this article was first published. To keep up to date with the latest sales, check our members-only music NFT database, which is updated at least once a week.

In this time of sociopolitical crisis, you may have noticed that the world is warming up to cryptocurrency at levels never seen before. Bitcoin hit an all-time high of $40,675.80 on January 8, 2021; despite its recent decline, it’s still grown 4x in value year-over-year (YoY). Ether has grown more than 7x YoY, and is close to reaching its all-time high price of $1,386.02 that it last recorded three years ago. Today, all the crypto in circulation is worth around $1 trillion, making it the fifth most-circulated currency in the world by value.

What may have not sunk in until now is that the music industry — and the independent artist ecosystem in particular — stands to benefit directly from this cultural and financial shift.

Back in October 2020, I wrote for Water & Music about how independent electronic artists like RAC and 3LAU were experimenting with limited-edition crypto collectibles, or non-fungible tokens (NFTs), around their music. (Think Spotify Canvas looping videos, except only one copy exists on the blockchain and only one fan can own it at any given time.) These audiovisual NFTs were selling on crypto-art marketplaces like Nifty Gateway, SuperRare and Blockparty for as much as $21,000 a pop — setting the stage for a new kind of scarcity-driven “drop culture” around music, and inverting the dominant consumption model that was paying fractions of pennies on the dollar per stream.

At the time of that article, this concept of selling music NFTs was still relatively rare; it would have been a bit overblown to claim that there was a legitimate “market” around the format. Fast-forward to today, however, and the landscape looks much different.

According to my own research, monthly music NFT sales have skyrocketed 150x in the past six months, from only around $2,000 in sales in June 2020 to over $300,000 in December 2020.In this time period, over 20 musicians have sold NFTs to fans and digital art collectors, driving over $800,000 in total sales on the primary market — the equivalent of around 230 million streams. With anticipated NFT drops this month from major artists like deadmau5, this sales figure will easily surpass $1 million by the end of January.

(Note that these revenue figures do not include secondary-market sales of NFTs, nor do they include music-centric social tokens like Lil Yachty’s YachtyCoin, which drive even more value but are not technically NFTs because they are fungible. We’ll dive into that later.)

It seems that artists are waking up to how, unlike previous iterations of blockchain in the music industry, this isn’t just another hype cycle hindered by legal and political bureaucracy. There’s real, legitimate money to be made here, in a relatively simple and immediate way — not to mention a real chance to lay the groundwork for the alternative music economies so many of us have been asking for in the wake of the pandemic.

I decided to dig into the data behind music NFT sales to paint a more concrete picture of the current state of the market, and what opportunities artists and their teams should be on the lookout for in 2021. Since last summer, I’ve been tracking pricing and sales trends for dozens of music NFTs on Nifty Gateway, SuperRare, Blockparty and other similar platforms, as well as artist-centric social tokens emerging on platforms like Zora, Fyooz and Rally.

I’m excited to share my preliminary findings with you below. As a Water & Music member, you will also have access to the data behind this research, which you should receive in a separate email.

Why this matters

Let’s step back and clarify what we’re actually talking about, and why it arguably matters to anyone working in music today.

For the uninitiated, an NFT is a crypto token that, unlike the U.S. dollar or a standard cryptocurrency like Bitcoin, is rare, unique, not mutually interchangeable and indivisible into smaller denominations. In practice, it’s like a digital version of a rare vinyl record or tour T-shirt, with verifiable scarcity built-in thanks to blockchain technology. NFTs have taken off in the world of digital art auctions, where the economics are not that far off from how fine-art auctions work in the physical world; with NFTs, people just bid and pay with Ether or another cryptocurrency instead of with fiat money.

A music-centric NFT would be an example of what the startup Zora calls “cryptomedia,” or “universally accessible” digital media with rare, “individually ownable” property rights. For example, anyone with an Internet connection can listen to the song and view the video featured in 3LAU’s “Star Crossed” NFT, but only one person can own the token that represents that piece of art.

How is this relevant to the music industry right now? As Water & Music has covered extensively, the pandemic-induced obliteration of touring has forced the entire industry to reckon with the fact that the current streaming model is financially inadequate for most artists. The gist of this predicament can be described as artists facing social pressure to morph into digital content farms for little to no money, in an effort to stay culturally relevant, ubiquitous and engaged with fans. This is hardly sustainable, and suggests a stubborn gap between the emotional value and market value of music in a digital world.

In the wake of this discussion, several artists and technologists have been experimenting with alternative business models around music streaming and fan engagement. One major throughline among all these experiments is that they are making the music consumption experience inherently more fan-centric — i.e. built in a way that optimizes for the value of the artist-fan relationship, rather than for a listener’s general engagement with a sprawling catalog of millions of tracks. Tipping, paid memberships, virtual meet-and-greets and social curation are just a few of the ways that artists and communities are more efficiently capturing the value of superfandom.

Another increasingly common through-line in these new models is the introduction of scarcity to digital music products and experiences. As I argued in my last piece about NFTs, in our current economy, artificial scarcity creates the conditions for discovering the true market value of culture. While scarcity is built into the brick-and-mortar touring model, it’s antithetical to modern-day streaming, which favors ubiquity, scale and low-cost access to mass catalogs. As a counterweight, many new music platforms and fan experiences today are embracing some sense of digital scarcity — whether through scarce digital events (e.g. ticketed livestreams), scarce digital relationships (e.g. exclusive fan communities) or scarce digital objects.

That last category is where blockchain, crypto and NFTs come in. Looking at the past half year of music NFT experiments, it’s clear that the format is not only creating new kinds of fan experiences that wouldn’t otherwise be possible, but is also allowing artists to have more control over the pricing of their own work and generate much higher margins on their contributions to culture, instead of assuming music’s loss-leading nature as given.

Now let’s dive into the data.

As mentioned at the beginning of this piece, music NFT sales are now surpassing $300,000 a month, and saw a significant spike beginning in October — likely due to early adopters like 3LAU, RAC and deadmau5 successfully executing on their NFT proofs-of-concept, paving the way for other artists to follow suit. For context, this is still a tiny part of the NFT market as a whole, which drew $8.2 million in total trading volume in December.

The top platforms for selling music NFTs today are SuperRare (42% of transactions to date), Nifty Gateway (39%) and Blockparty (9%), with other platforms like Rarible and CryptoKitties accounting for the remaining 10%. Both founded in 2018, SuperRare and Nifty Gateway are likely more popular than their competitors because they are both closed, heavily curated platforms, ensuring a higher level of quality and credibility for both buyers and sellers. Nifty Gateway is also one of the few crypto-driven platforms that allow buyers to pay for art with their credit card, instead of only with Ether or other cryptocurrencies, widening accessibility to a larger group of potential buyers.

Perhaps the most important trend to know around music NFTs is the unit economics:

Digging deeper, one realizes that the pricing looks significantly different depending on whether the NFT sale is framed as an auction of a single-copy artwork where fans can bid on the final price (like selling a painting at Christie’s), or as a more open sale of multiple artworks at once where the initial sale price is fixed (like listing 100 limited-edition T-shirts on your Shopify store).

To date, most music NFT transactions (63%) have been single-copy auctions — what is sometimes referred to in the crypto community as “one-of-ones,” or 1/1s. This reinforces how an emphasis on rarity drives the majority of value in the market.

In fact, the average price of a music NFT sold via auction is $13,381.88 — 50% higher than the mean. In contrast, the average price of a non-auction music NFT is just $891.03 — 90% lower than the mean.

It’s crucial to understand here that this pricing discrepancy stems from differences in what buyer behavior is allowed. In non-auctions, the final price is determined by the creator; in auctions, the final price is determined by the buyer. In the context of music NFTs, the latter gives fans more agency over expressing the value they perceive in a given piece of work, so is arguably a better option if you want full price discovery.

Another important factor to keep in mind regarding unit economics is that, as Cooper Turley (who leads crypto strategy at Audius) wrote in a recent blog post, “you only get to drop your first NFT once.” Given that so much of the perceived value of NFTs revolves around scarcity, the first NFT an artist drops is arguably the most important and likely the most valuable one, and it’s pretty common for the price of subsequent NFTs to drop over time as the scarcity value wears off. (One exception is PLS&TY, an electronic artist who has consistently sold NFTs on SuperRare for $1,600 to $2,700 apiece in the past few months, with no downward trend.)

Top NFT artists: Hip-hop and electronic remain the early adopters

According to my data, here are the top five music or music-adjacent artists by their total NFT sales to date:

Even though he’s not a music producer himself, I’ve decided to include Beeple in my analysis because he has worked on concert visuals and design for several major musicians like Justin Bieber, One Direction, Katy Perry, Zedd and deadmau5, and his success with NFTs could provide inspiration for musicians with a similar aesthetic. Other music-adjacent visual artists actively experimenting with crypto art include Gabe Damast (visual director for Zedd) and Gavin Shapiro (who has designed concert visuals for the likes of Yung Bae and Hollaphonic, and maintains his own free concert visualizer tool shapiro500), whom you can look up in my database.

To me, the above table reiterates that the economics of NFTs are fundamentally different from what we expect in the typical streaming world. For the artists listed above (excluding Beeple), the equivalent of just 0.08% of their total monthly Spotify listeners paid the equivalent of 140 million streams upfront to buy their NFTs. Unlike, say, maximizing playlist exposure, succeeding in a music NFT campaign is not about reaching the most people — it’s about reaching the right people who see the most value in your work, and are willing to pay top-dollar to express it.

Generally speaking, most of the artists who have sold music NFTs so far come from the hip-hop and electronic worlds, with recent entrants including PLS&TY, Adventure Club, Zack Fox and the late MF Doom. This pattern makes sense given that artists from these genres tend to be earlier adopters of new technology.

That said, I think there’s an opportunity to bring other genres into the mix, especially rock and country artists who have more tight-knit fan communities around them (even if they might be lagging behind other tech channels like streaming). The only rock music NFT in my database so far is Muse’s partnership with CryptoKitties — which sold 199 limited-edition NFTs for $99 each, and was facilitated through Warner Music Group’s 2019 investment in CryptoKitties developer Dapper Labs.

There’s also an open lane for larger, music-focused brands and communities, not just individual artists, to experiment with NFTs. Space Yacht, the L.A.-based dance promoter that launched its own label last year, is the only brand in my database so far, having sold over $9,000 worth of NFTs so far on Nifty Gateway. I can see other music brands and collectives like Lyrical Lemonade, Soulection and Dreamville pulling off a similar model easily.

We’ve established in the data above that music NFTs are quickly becoming a multimillion-dollar industry, and that, primarily through auction dynamics, they revive a sense of scarcity that’s largely been lost from the digital music ecosystem.

So, what’s next? Aside from one-off NFT sales, there are many other crypto-centric opportunities that artists and their teams should be on the lookout for in 2021:

A. Social tokens

I briefly mentioned social tokens in the first section of this piece as distinct from NFTs. In short, social tokens are crypto tokens backed by the reputation of an individual and/or community. Outside of music, people are currently using social tokens as the price of admission for paid email newsletters, private Discord servers and exclusive fan communities and events, with a built-in incentive mechanism in that the value of the token rises as the community grows.

Unlike an NFT, a social token is fungible, like Bitcoin. For instance, if you and I both had a $WATER social token representing the Water & Music community, we could exchange our tokens with each other and they would still hold the same exact value and use case as before, which wouldn’t be the case if we owned two separate limited-edition Water & Music crypto artworks.

There isn’t enough data on music-centric social tokens yet to make any concrete conclusions about the market like with NFTs — but there are some early signals of what’s to come. For instance, in October 2020, RAC worked with Zora to mint the $RAC social token, which the artist gifted exclusively to his supporters on Patreon, Twitch, Bandcamp and Shopify, as well as holders of the $EGO token tied to his previous album. The token cannot be bought or sold on any third-party token exchange platform; it can only be earned through ongoing financial support across RAC’s channels, and unlocks access to community-exclusive perks.

Elsewhere, the Swiss platform Fyooz currently powers the social token for Lil Yachty (YachtyCoin), and soon the social token for Lil Pump. Roll, a social token app that recently announced strategic partnerships with Akon and Ja Rule, also powers tokens for several online communities such as Friends With Benefits. Audius, the Ethereum-powered streaming platform that has faced controversy around its copyright enforcement (or lack thereof), also has its own social token $AUDIO, which the company has gifted to its artists, community members, investors and staff.

One of the most fascinating side effects of the rise of social tokens is the ability for outsiders to measure the “market cap” of a community. For instance, at the time of writing this, $RAC’s market cap is currently at around $976,000, while $AUDIO’s market cap is around $26 million. While these are relatively small numbers compared to some of the top cryptocurrencies (Bitcoin’s market cap right now is over $704 billion), hopefully this kind of transparency can give enterprising artists more leverage moving forward, in terms of understanding the value that their audiences and fans bring to the table on a more concrete level.

B. Integrating NFTs with online events

Given that NFTs function like rare digital merch, it makes sense moving forward to try integrating them into online events, such as livestreamed shows or album listening parties — especially because these kinds of events attract the very fans who might be more interested in buying an artist-branded token, anyways.

This is still a relatively emerging practice, as there are few platforms out there that accept crypto as a form of payment. 3LAU, RAC and Lucy Snake have recently performed sets in Decentraland, a virtual 3D world with a built-in marketplace that runs exclusively on the MANA and LAND crypto tokens. The gaming industry, which already has an established infrastructure and economy of in-game collectibles and micropayments, will likely be a more aggressive mover in tying NFTs to virtual worlds and events.

C. Music-specific NFT marketplaces, platforms and services companies

As the music NFT market continues to grow, we should also expect to see many music-focused marketplaces, auction platforms and services companies emerge to service artists’ specific needs, especially given the unique legal issues around enforcing music copyright.

Aside from streaming platforms like Audius, Zora is planning on launching a music NFT marketplace called Catalog in the coming months. Crypto-first record labels like DAORecords already exist and will likely become more relevant this year, either as standalone entities or as specialized roles or departments within existing labels. On the social token side, Cooper Turley has started a “social token agency” that helps creators and influencers strategize around how to maximize the value of their tokens, as well as the integrity of their community experience in the process.

Conclusion: What about the long tail?

You may have noticed that most of the artists included in my music NFT database so far had already established a loyal following prior to experimenting with crypto. Indeed, for every successful music NFT sale out there, there are dozens if not hundreds of other music NFTs that only have a handful of views online and have yet to attract any bids from potential buyers.

This raises an important question about the future of the market: Is there any room for emerging artists who don’t have the right audience size? Can NFTs facilitate new music discovery, or are they good only for engaging existing fans?

To return to Zora’s notion of “cryptomedia,” inherent in that concept is that an NFT will be more financially valuable the more people are aware of its content and its creator. This framing certainly rewards scale, and implies that the most valuable music NFT transactions we see this year will continue to come from the most established artists and celebrities.

That said, whether NFTs can facilitate music discovery is maybe the wrong question to ask. A better question might be what new music subcultures NFTs will create that would otherwise be rejected by incumbent gatekeepers.

Because crypto enables entirely new kinds of market forces and fan behaviors, we can expect what Denis Nazarov recently called a “crypto-native subculture” to gain a stronger hold across NFT marketplaces more quickly than any established cultural trend off-platform. We’re already seeing this with the digital art on platforms like SuperRare and Nifty Gateway — whereby the visual aesthetic that tends to “sell well” is much more abstract, trippy, glitchy and absurdist than what you would typically see in mainstream media — and can expect a similarly left-field musical style to emerge from the next iteration of NFTs as well.

All in all, the combination of emerging cultural influence and accelerating, dynamic financial value has turned music NFTs into a coveted format for both artists and fans, that the music and tech industries can no longer afford to ignore.