A productive asset model for the Crypto Music industry

Expanding on a tweet

Partly inspired by this post, written by Dankrad Feist…

Partly inspired by what feels like a subtly-then-suddenly changing narrative in the NFT space…

Partly still fired up by a week of Devcon and empanadas…

I sent out this tweet challenging the long-term and sustainable value of music NFTs.

The tweet itself kinda got ratioed, although in a good way if that’s a thing. Lots of the engagement was interesting comments debating the post, though many were requests to explain what I meant, and so that is the foundation of this post.

Fixed-supply vs. productive assets

To paraphrase Dankrand Feist’s argument in the piece above (which you should for sure read), Crypto should abandon the narrative of finding long-term value (”store of value”) through fixed-supply mechanics and instead look to the performance of the S&P 500 vs. gold (the common poster child of fixed supply value store) over a reasonable time period.

Put simply, a productive asset is something that you can invest into that provides ongoing value and can sell in the future. Buying a house to rent it out, for example. Or investing in company stock.

Feist’s point is that short-term, fixed-supply mechanics can show high returns, but it’s not sustainable. Some supporters of fixed-supply mechanics can claim that they are less volatile than productive assets, but in reality, that’s hard to prove, and quite easy to counter-prove. Ultimately the argument often rests in an apocalyptic, if-there-was-a-nuclear-war-then-I-still-have-my-gold mentality, but if the nukes are flying then let’s be honest, it’s all pretty much done for regardless.

I guess I inherently always thought this way. Back when we were designing a token for JAAK as part of a proposed ICO roll-out (which we never did, thankfully), the meme was to make your economy deflationary to maximise value for early supporters. But we were also creating a token that we wanted to be useful. A token without stability, and with deflation properties, was never going to be a good mechanism to pay for services. You could use an Ethereum “gas fee”-like mechanics, but even still, as we’re seeing, that requires things like L2s to make it affordable and there is still significant instability in the cost of services.

Fortunately in the time since, “stablecoins” (USDC, DAI, RAI, etc.) have become more of a dominant force. Still, it’s clear to see the carryover of the deflation mechanics mentality into how people are framing up NFTs as value opportunities.

Patronage doesn’t scale, which inhibits diversity and opportunity

First up I just want to say that this isn’t intended as an attack on the current Music NFT model. I love that we have managed to bring a primitive to the music industry that allows for direct monetisation by artists. I love that it is something that the traditional industry can barely understand and, honestly, scares it.

But we have to be honest with ourselves in that the current music NFT market is very small and is being built on the backs of a few individuals with high conviction. Fair play to them for taking the charge in this initial phase, but it’s unsustainable when considering the growth that we need to achieve genuinely game-changing disruption.

I posit that one of the key problems here is in the narrative that we’ve developed over the past year that “the music is the utility”. You buy a music NFT to support the artist, the music is available to all, but you financially supported them in putting it out there. That’s a patron model, akin to gentlemen scholars investing in science in the Victorian era.

This logic is then backed up by the notion of a fixed supply of tokens, “imagine if there were 50 NFTs released with Jimmy Hendrix’s All Along the Watchtower, how much would that be worth nowadays!”. Yeah, maybe something, but there’s a bit of cognitive dissonance. It’s using an example of already proven success, which is incredibly rare in the music industry, to justify a model for the whole industry in the future. Like, if BTS did a run of NFTs I’m sure they’d make a lot of money, but if everyone in the industry did a run of NFTs then the relative value for 99% of the industry would fall away very quickly.

A brief mention here on the linked but different issues that I have with the “creative economy” and “1000 true fans” argument. The logic goes that a creator can find a small number of supporters (patrons) who will fund their career for a consistent service (be it a regular twitch stream or whatever). The problem I have with this is that it turns the reward that a creator can generate into something linearly linked to their ongoing effort put in; i.e. it’s not scalable. It’s akin to a creator gig economy, which is completely at odds with how a creator needs to operate. They need time and space to create, explore, and grow.

So I think that we need to take a sober look at music NFTs (and the creator economy) as they are in their current state, and consider if, yes, we’ve proven some initial success in terms of individual stories, but whether we need to move our thinking further to drive the next wave of development and growth.

The key to this, for me, is in building music tokens as productive assets.

Music rights are productive assets

Flicking our minds away from crypto for a second and think about the “traditional” music industry. Arguably, its financial structure of it runs in a productive assets model. Investing in artists, investing in rights, with the reward of royalties, and the option to sell that position is extremely analogous to the description above.

In fact, companies such as Hipgnosis have argued many times in the past that music rights as a productive assets investment are especially strong as they are uncorrelated to the stock market.

One could at this point feel like this entire article is somewhat moot. Music is a productive assets industry and everyone should be working on a Royal-style project to democratise investment….

But wait, hold up, I’ve previously argued that we probably need to move past the established royalty-based financial structure underpinning music. The Royal model does the opposite by building a new structure around the old financial model. And where do “music NFTs” come into the whole thing?

Creating productive assets in music without royalties

What if I told you that music NFT doesn’t need to have music in it? And what if I told you that including a link to the music in the metadata may actually depress its value rather than increase it? The rights involved in the sharing and monetising of music are based on copyright, there is no universal register for that copyright, and they in reality represent risk and liability for anyone seeking to build on top.

As an interesting thought experiment, take the first few Royal sales from last year. The hype was high and the NFTs sold out quickly, but I argued at the time that linking future royalties to the NFTs likely depressed their value to collectors. It’s hard to decern genius over good timing in a bull market, so we’ll never really know, but I stand by that assessment. It’s been a few months since they did a drop on Royal…providing a further indication of that logic.

To bring in a further data point in this argument, the most successful Web3 Music release of the past few weeks, in a bear market, was for sure the Probably Nothing x Warner drop for “Probably A Label”. There was no direct music link in these NFTs, but good connections with the wider collector community of Probably Nothing, and it sold out 5,555 tokens instantly, in a bear market.

These are two examples, but I think show extremes of including the traditional music industry structure of productive assets in a token drop (royalties and Royal) vs. building and leveraging next-generation communities and brands as a foundation.

Productive assets through community + brand

Expanding on the definition of productive assets, from a charming publication called Town And Country Bank:

“Other examples [of productive assets] include education, skill sets, trademarks, and land. Often, productive assets help you produce more assets. For example, investing in education can help you earn a higher salary, leading to more financial and physical assets. Credit is also considered a productive asset. In other words, the better your credit score, the more financial flexibility you have.”. [link]

By this definition, I think that the best example that we have in crypto right now is Nouns.

Nouns is a community and a brand, that enables those that buy in to leverage the community and brand to generate their own value through the development of .. well anything they want.

Nouns is a general example, but there are some examples closer to music. I mentioned Probably A Label previously, combining the brand and community of Warner and probably Nothing, but I would argue that Friends With Benefits is another successful community + brand productive asset play.

FWB is a group that has provided significant value to its members, from opportunities to build spin-off companies, to education, to networking. And further satisfies the criteria of being able to cash the investment (tokens) out if the user decides to.

Developing a framework for productive assets in music through community + brand

Why is this important in the context of the original tweet?

Because music, arguably, carries one of the strongest brand values that humans have. Furthermore, it can bring together communities in a way that no other medium can.

If we can get past this idea that Crypto Music needs to run on a patronage model. And past the idea that the only productive asset model for music rests in royalties. Then I think that the design space for building productive assets based on an artist, band, curation group, label, whatever’s brand and the community that they build could be really quite incredible.

And to tie all this together we already have the glue; tokens. Not solely tokens that carry music in their metadata (although these may make sense in some specific examples), but fundamentally tokens that represent the collective entity.

I foresee artists leveraging their brand and communities into token-enabled ecosystems that catalyse the group's talent and energy into a world of shared assets. Owned by them, the artists and fans that build it, and not the tech companies that would otherwise extract this value in a web2 world.

By this notion, one could argue that I was possibly too harsh on the creator economy / 1000 true fans thesis as an idea. My argument is probably more that it doesn’t really work currently where there is a one-way value transfer. But build that into a productive asset model, with tokens and shared value generation, and maybe we’re on to something.

The more I think this through, the more sure I am that this represents one of the key pillars that the next wave of Crypto Music will be built on. And I am excited in seeing how we can contribute towards this discovery with all the work that we are doing at HIFI Labs; through musicOS, by building permanent connections between artists and fans, and neume, by building out open infrastructure that will power the next generation of music development.