You’ve already heard all about them (whether you wanted to or not), but how much do you really understand about NFTs? As a seasoned music industry vet and practicing attorney, Debbie Egel is here share her expertise on the topic and break it down for us. Let’s dive in…
Everything You Need To Know About NFTs
What are NFTs?
NFTs are non-fungible meaning it is unique digital item, and therefore it is not interchangeable. Each NFT is a unit of data on a digital ledger on the blockchain. NFTs can house digital files such as Jpegs, MP3’s, videos, GIFs and more. While the digital files themselves are reproducible, the NFTs (tokens) representing the files are limited and provide buyers with a certificate of authenticity that elevates the token beyond cryptocurrency.
Let’s talk NFT’s in the Music Industry…
NFTs in the music industry can take on many forms, such as ticket sales for concerts (virtual & physical), back stage passes, sample packs, previews of unreleased songs, and more. This allows the Artist to monetize their fan base in brand new ways and NFTs offer the exciting possibility of cutting out some of the industry’s middlemen.
Artists can release exclusive or limited runs of creative works and that digitalized art can be attached to a smart contract, lines of code, built into the token that automatically execute behaviors, such as giving the original creator a royalty (10-20%) each time the token is resold in the future. This allows the tokens to be bought and sold and the value is largely set by the market and by demand.
Note: Before you go creating NFTs guaranteed immediate success, it’s important to note that what has driven the success of bigger NFT projects is that there is a strong sense of community amongst the owners of those NFTs. Music NFTs are much more likely to be successful if an artist already has a strong, core fan base that has expressed interest in buying NFTs from the artist.
Why Would Anyone Want to Buy an NFT?
Think about NFTs like collectibles, similar to people who collect baseball cards. In music, similar to the people who bought Nipsey Hussle’s limited-run collector’s edition music. The popularity of NFTs is exclusivity and the fact that the consumer has something that not many others have. In addition, NFTs are desirable for both artists and collectors. Why?
- Artists can easily track their art, receive money from resales, and sell directly to the market.
- Collectors can invest in Artists they believe in and want to support.
Others might buy NFTs as investments, hoping that someday in the future their NFT will retain or appreciate in value, and it can be sold for a profit. This is a bit riskier than purchasing something because of its cool-factor, but for many customers, buying an NFT is a mix of both.
Quick Tip: NFTs can be sold on crypto-marketplaces or auctioned off on platforms. Most marketplaces do not accept credit cards or traditional forms of cash and instead ask for cryptocurrencies, but there are a few that accept both traditional cash and cryptocurrency.
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4 Steps to Setting Up NFTs
- Create a digital wallet
- Purchase crypto currency
- Mint an NFT
- Connect the wallet to a marketplace
Marketplace Considerations include:
- Marketplace size: which blockchain has the largest amount of NFT buyers and sellers?
Secondary markets: are there other marketplaces that can be used to sell and trade NFTs on the network?
- Additional apps and services: what kinds of wallets, exchanges and other services are available on the blockchain network?
- Mining fees: creating NFTs can be very costly as an out-of-pocket expense. While platform choice may determine how and when these fees are paid, with some blockchains charging lower fees than others. (Some of this is due to Proof of Work vs Proof of Stake.)
- Environmental impact: what is the carbon footprint of the blockchain?
Considerations for NFT creation:
- Collaborations: Creating audio-visual loops
- Behind the scenes footage
- Experiences: Back stage passes, phone call from the artist, front row tickets to upcoming shows.
- Copyright ownership: If the artist does not own both the SR and PA copyright, the Artist will need to get a license to use it in the NFT. If it is an audiovisual NFT, then a synchronization license should be considered. This would be similar to sample clearance and the owner may or may not want to grant use.
- Artists signed to Labels: Need to review the recording contract language.
“Minting” your NFT
To begin, the NFT has to be “minted”.
- Minting is a process which involves uploading the media, setting the rules in a smart contract, and paying a “gas” price to have it written and validated onto the blockchain.
Gas prices fluctuate and the NFT platforms vary on the cost ($40 to $100) to mint an NFT, and who pays the fee (Artist or purchaser).The smart contract (which is a template on the site) allows you to define the conditions of the sale including whether you want to run an auction or sell a token at a fixed price.
You may also have the option to program in resale royalties and the type of Cryptocurrency you’d like to receive for selling the NFT. Royalties allow NFT creators to earn a commission every time the asset is sold to a new person. This has the potential to create automatic lifelong passive income streams for artists and other content creators.
Pros of NFTs:
- NFTs offer a potential new form of revenue and allows the fans to directly support the Artists they love.
- Artists can create a more secure transfer of ownership of intellectual property like songs, than the current model. The transfer of ownership via blockchain can be recorded by “smart contracts” and processed within seconds.
- Ticketing for live and virtual events has been dogged by inefficiency, bots, scalping, hidden fees, and counterfeits for a long time. NFTs makes scamming nearly impossible, allowing for much more clear transfers of ownership and easier verification and can prevent secondary sales if it is written into the smart contract.
Cons of NFTs:
- Emerging Artists: NFTs are often driven by status and hype and not by merit, it stands to reason that emerging artists would not fare well. Also, the upfront fees to open an account and create the NFT may act as a barrier for new artists.
- Scarcity: Digital scarcity needs to be manufactured. For example when you perform virtually you would have to create a limited number of tickets to make it appear valuable, and although this exclusivity brings in higher price tags at marketplaces, it excludes many of the artist’s fans when it was not necessary to do so.
- Bubble Trouble: Could this be the new dot.com bubble? Are we over-valuing what these non-fungible tokens are because of their current trendiness? If the prices of NFTs sold are based on hype and manufactured scarcity, waning interest could prove dangerous for those who have purchased NFTs as investments.
- Intellectual Property: Given the newness of the technology and the complexity of copyright laws worldwide, smart contracts in a decentralized system could easily run into issues.
Remember, this is all very new. Future opportunities and mistakes are inevitable, at least until there are more precedents set and more knowledge and understanding. For now, artists should inform and explore this new world of NFTs, social tokens, smart contracts and block chain technology as it continues to grow and has the power to change life as we currently know it.
This information is brought to you by Debbie Egel, an attorney whose practice includes writing and reviewing music contracts, running an independent label for over 10 years; and developing indie artists. She is knowledgeable of the economics of music, the DIY process, and has written an instruction manual for Indie artists, labels and managers called “For The Record” and teaches an on-line course. Debbie has a deep appreciation of the business of music as well as her legal knowledge as a practicing attorney.