Delphi: Music NFT model trends, investment theories and considerations when issuing

Since Beeple's record-breaking auction, NFTs have become synonymous with 2D visual art, jokingly referred to in the industry as "small pictures/JPEGs", and the vast majority of the most valuable NFT brands are static images. In contrast, audio and video NFTs are not worth mentioning in terms of trading volume.

But will “small pictures” rule the NFT market forever? That seems unlikely, especially given today’s digital media landscape.

First, there are far more people who love music than art. The music industry generates $57 billion in revenue from billions of people, with more than 500 million subscribers to paid streaming services. Art, with global revenue of $50 billion, seems comparable in size. But for art, there are only an estimated 10,000 art collectors who regularly buy expensive works of art. The difference in popular attention is staggering.

Of course, it’s unclear whether the future of NFTs will resemble today’s media landscape. But a combination of factors, such as collector culture, early adoption, and recent sales numbers, suggest that music NFTs are particularly worthy of close attention. In this report, we take a deep dive into why music NFTs are a good fit for collectors from a collector’s perspective, as well as the emerging trends we’re seeing.

Delphi’s investment thesis on music NFTs

There’s a reason NFTs are taking the visual arts by storm: the art world is unburdened by copyright laws and industry gatekeepers.

Music, on the other hand, has more hoops to jump through. Technically, any play of a song is copyrighted, making NFTs more complicated to display. Music’s supply chain is also more challenging. Visual artists are used to selling directly to consumers, while third parties like streaming platforms often sit between musicians and fans. Finally, the music industry is notorious for its love of legal battles before simply embracing technology.

These are serious shortcomings. But there is an even stronger group of founders, builders, and investors who are undaunted in their mission to realign incentives. As more people join the crypto industry and web3, we believe artists will have more and more opportunities to ignite their careers and sustain them on their own terms. This isn’t just about bypassing record labels, we’re talking about entirely new revenue streams and engagement models that allow artists to build more successful, sustainable careers.

There are several areas where Delphi is particularly interested:

• Superfan Engagement and Rewards: Fans and fan clubs will become an even more integral part of an artist’s journey. Web3 tools here can help fans gain status and rewards for their support.

• Social Graph: Every artist can now build their own fan social graph, which can be verified through on-chain actions, such as participating in an NFT purchase, or applying for a POAP NFT when attending the latest show.

• Closed-loop relationship between artists and fans: NFTs and tools transform the relationship between fans and artists from consumption to collaboration. We hope to see more artists experiment with using token communities and DAOs to create closer connections, including crowdfunding and marketing.

• Curation and Discovery: Platforms and protocols can incentivize better curation and discoverability models. This will allow fans to build a reputation as tastemakers while promoting emerging artists without industry gatekeepers.

• Composability and standardization: Even with ERC-721, there is a lack of standards for NFTs, especially for multimedia. Now, experiments around smart contract frameworks may revolutionize the way art is created.

Why Music NFTs? Why Now

Cryptocurrency wallets have exploded, with MetaMask’s monthly active users (MAUs) recently surpassing 30 million, up from 5 million in April 2021, and tastes in digital art are likely to expand. The profile of the typical NFT buyer is rapidly evolving, and it’s undeniable that music NFTs will reach a wider audience.

Beyond the theoretical appeal, the music industry is seizing on the opportunity. Major labels like Universal Music Group are experimenting with NFT-centric virtual bands with BoredApe. Meanwhile, artists like Grimes and 3LAU have sold NFTs for more than $1 million, opening up a whole new revenue stream.

Music also has a unique history and culture of ownership that unlocks asymmetric value, especially compared to other media. Among artists, musicians arguably create the most culturally influential things in terms of what they capture. Take Kanye West, for example, whose name alone has generated billions of dollars in market value for partners like GAP and Nike. In fact, no one in the fine art world can claim to have such influence. The late Virgil Abloh, a longtime collaborator of West, saw this dislocation and planned an NFT-centric DAO before his untimely death.

The industry’s internal realities make web3 particularly well-suited to disrupt the traditional music model. For most artists, Spotify is a tool to gain exposure for free. 99.4% of streams on Spotify come from the top 10% of artists. Streaming platforms are now fighting for lower artist payouts. NFTs offer a way for more artists to make a living from their work, which could speed up their adoption.

Finally, music has a natural power to create close-knit communities. NFT brands like Bored Ape have been able to rise so quickly in large part because of their communities. For many, holding BAYC isn’t about the graphic aesthetics or showing off their avatar on Twitter. Instead, the value comes from exclusive brands, real-life events, and growing followings. With 40 million followers, the Korean pop group BTS has the most fervent fanbase in the world. If launched correctly, music NFT collectibles could garner similar appreciation.

Patterns for Audio NFTs

While audio NFTs, which come in the form of MP3 and WAV files, are a relatively niche market compared to small images, Opensea routinely sees more than $100 million in daily trading volume. However, music-focused NFT platforms have proven that the concept is economically viable.

Now, various platforms are experimenting with what is important to collectors. Royal and Decent are tying NFTs to royalty revenue. If successful, this model will be a powerful combination. Not only will NFTs attract collectors, but early fans will also have ownership of song streaming. Sound.xyz is trying a 1-of-many model, where a single song is owned by a group and has privileges such as public commentary. These platforms are venture-backed and helmed by music industry insiders, and have high potential.

However, it’s Catalog’s full singles (1-of-1) model that’s really sparked interest in the niche. Catalog is similar to the familiar SoundCloud library, but allows songs to be sold and auctioned as NFTs. Currently, Catalog is in an invite-only beta, targeting up-and-coming artists who are learning about the cryptocurrency industry. But well-known brands such as Boyz Noize, Vic Mensa, and Mick Jenkins are already selling on the platform.

Catalog’s full-single model may have reached an inflection point. In October 2021, Catalog’s volume surged to $600,000, a 13x month-over-month increase that helped it pass $1 million in cumulative sales. Even in the turbulent market of early 2022, the platform’s volume has held up.

In December 2021, Sound launched its Share Fragment NFT platform, which allows artists to host a listening party for a new song and release it as a limited edition NFT. Fans can support their favorite artists, make public comments on songs, and interact with singers and other fans. Sound has released 84 songs and 66 artists, with a total transaction volume of 432 ETH ($1,197,587) and 855 ETH ($2,369,882). Artists have received 518 ETH ($1,434,586) in commissions from secondary sales, which is a good number for a platform that was only launched four months ago.

Other audio mods like Async Art and Arpeggi are able to break down music NFTs into tracks (like drum patterns or bass lines). While this may have a niche appeal, they have the potential to become collector’s items.

Breaking songs down into independent units on-chain could be a powerful lever for adoption. In visual art NFTs, collections like Art Blocks and Gen Art have become popular in part because collectors pore over scarcity and on-chain metadata. Early generative audio NFTs by Deafbeef and Euler Beats have also become popular for similar reasons. As music NFTs expand, on-chain attributes are likely to become increasingly important.

On-chain music tracks also have the potential to create new revenue streams for artists and producers if they can be easily remixed and reused. Companies like Splice have proven that royalty-free samples are a huge opportunity, and the successor to the technology may be CC-0 licensed music NFTs. Although far from today's reality, streaming and royalty payment activities may shift to on-chain payments in the next decade.

In terms of collection strategies, there isn’t a clear playbook yet. There’s no real “index investing” to bet on broader growth, but VC-backed platforms like Catalog, Royal, and Sound have some potential for retroactive airdrops. If music NFTs take off, then preempting the market and getting artists’ original work on these platforms will be a high-risk-reward bet. Likewise, it’s unclear which artists or collections will become historically significant. Building a blockbuster sale from a web3 artist with the potential to be a star is more compelling than limited edition NFTs of Tory Lanez. But as more credible musicians embrace web3, that may become less true.

One source of alpha could be the proliferation of investment clubs. Following the Pleasr model, groups like Noise DAO (with a 1,750 ETH pool) and Morii Music are quietly acquiring music NFTs. So far, their strategy seems to be simply to collect artists they like and think could become blue-chip stocks.

Whether participating in these clubs or simply monitoring acquisitions from outside, narratives and collector profiles play a big role in pricing. As the saying goes, “collect what you like” because the liquidity situation of NFTs trading is a double-edged sword.

Early Music NFTs Trend

Music NFTs are enabling a new wave of independent artists to circumvent the middlemen of the music industry. A classic example is Daniel Allan, who was able to crowdfund the costs of producing an EP with only a few hundred Twitter followers. Allan raised 50 ETH ($140,000 at the time), more than double the fundraising goal on Mirror. Backers of Allan's EP received 50% of future master royalties, which effectively spread out the typical record advance.

Stories like Allan’s are increasingly common. According to Delphi’s analysis, the median artist on Catalog has 16,000 monthly Spotify streams and 3,300 followers on Twitter, suggesting that the majority of web3 musicians are currently independent or unsigned.

Surprisingly, an artist’s popularity on Spotify does not correlate strongly with sales on the Catalog. Sales tend to cluster around 1 ETH, without a lot of variation based on Spotify’s monthly traffic. This suggests that early collectors are willing to support less established artists and place value on early debuts by musicians.

Artist Case Studies

How can up-and-coming artists leverage NFTs?

A notable independent case is Haleek Maul, a rapper who grew up in Barbados, who sold 9 works on Catalog for a total of 133.6 ETH (or $299,000). Maul has sold 8 of the most expensive works on Catalog, mostly ranging from 10 ETH to 25 ETH. Sales of Maul's INNER mini-album (56 ETH, or $256,000 at the time) can be converted into 58.7 million Spotify streams. Interestingly, Maul has a relatively small following on Spotify and Twitter (about 4k monthly streams and 8k Twitter followers), but the artist has made a great effort to move closer to web3. Doomsday is a venture-backed production company that crowdfunds music videos through NFTs. The company has been working closely with Maul with the goal of winning a Grammy Music Video Award.

Independent artists have arguably gained the most from NFTs, and they will be the ones to watch as artist play evolves. There’s also a lot to learn from the top artists who have already released music NFT collections. The NFT offering from Disclosure remains a groundbreaking case study of what’s possible. We’re biased here because our Delphi colleagues bought this NFT. A few things went well with this sale, first of all, the art had the iconic Disclosure face imagery that appears on all album covers. And it had a unique selling point: owning it got you 4 free tickets to all Disclosure concerts worldwide.

While this is undoubtedly a unique case, it’s clear that NFTs can help foster special relationships between artists and fans.

Another play worth checking out is Avenged Sevenfold’s Deathbats Club (DBC), a fan community centered around NFTs. Certain features in the band’s NFT creation determine fans’ access to concert meet-and-greets. This model could easily be replicated by well-known artists, although it would require some serious commitment and follow-up work to deliver a real-life experience. The negative reputation risk of over-promising and under-delivering is real for your super fan community, so it shouldn’t be a choice we make lightly.

The DBC series has generated over 280 ETH in transaction volume. Artists who take the time to do this well and really lean into the most exciting aspects of web3 will benefit greatly from seeing their fan clubs own their hard work.

Not all mainstream sales went smoothly. The band Kings of Leon generated huge sales for their NFTs, but the process was met with mixed reception because Ethereum fees were more expensive than the NFTs people claimed. The band also auctioned off a small number of unique NFTs that gave the holder four front-row tickets to any KOL show. There wasn’t a lot of trading activity, but people paid over 300 ETH for them at the time. Gas fees also hurt Tory Lanez’s sale, which sold 1 million NFTs for $1 each.

Recommendations for the First Music NFT Release

Artists entering this space must be aware that this is a 10-year game, not a trend of a few months. Unfortunately, some artists took advantage of last year’s NFT craze to dump on their fans. If you look at platforms like Nifty Gateway, you can see some big names who released music NFTs but never had any communication with the NFT holders. You can see a clear downward trend in their secondary market sales.

Planning is key. When asked to comment, Haleek Maul offered the following advice for artists:

The first release is crucial, and I think the best advice is to plan it out as much as possible. Decide on the story you want to tell, and make sure you convey it to your audience in the best possible way. I think that's where the ideal value comes from, focusing on a core idea and building on that.

Haleek Maul

The legal implications are also worth investigating beforehand. Independent and unsigned artists flock here because the legal complexities are far less. As Disclosure explained on our podcast, digital offerings are increasingly being captured by major label contracts:

If you're an independent artist right now and a major label wants to sign you, I would think about it carefully. Or at least think about the NFT section in the contract, or if it doesn't have a section about NFTs in the contract, make sure it is in the contract.

Disclosure (Lawrence)

Finally, it’s wise to consider what super fans want most. Artist Harris Cole, who sold 16 works on Catalog, offers the following advice:

My best advice to artists is to identify what they can bring to the table based on existing public sentiment. For me, that means including scarce cassettes from my debut album Pause. These cassettes sold out a long time ago, and we only produced a few, so people who have been listening to my music since it came out might be interested in getting a cassette.

Harris Cole

Delphi Digital frequently assists artists and big brands with their first NFT offerings. Here are a few points we would like to add:

• Make sure your release is well thought out so you can create a big buzz.

• It’s important to make sure your NFT has a story associated with it. Make sure your NFT aligns with your brand.

• If possible, include something extra: whether it’s access to a show, a Discord channel, or even physical exclusive merchandise/vinyl. However, the main focus should ultimately be on the NFT itself, and not necessarily the additional perks.

• Right now we see a lot of NFTs being released just to capture immediate value. Think long term.

Gradually rising

While still in the experimental stage, record label DAOs are a promising new institution for talent development. Dreams Never Die, Good Karma Records, and HiFi Labs are using the latest web3 tools and community building strategies to develop artists and music merchants.

Creator-led DAOs are starting to have a tangible impact on cutting-edge artists. Artist guild Songcamp co-created a music NFT adventure game. SongCamp musicians and artists crowdfunded 40 ETH to create an NFT portal called Elektra, which requires an NFT ticket to enter. Songcamp also funds experimental teams that allow artists to collaborate, create art, and create web3 products, such as BPM, a music bot developed for Discord.

Similarly, MusicFund is an NFT community for music discovery, funding, and curation. Friends With Benefits (FWB) has proven to be a strong community for artists. This popular DAO has launched a scholarship and donor program to support creatives, and the grant is run by Pat Lok, an electronic musician whose work is sold on Catalog and Sound.

Elsewhere in the music industry, Audius, ModaDAO, and Metaplex are trying to bring crypto to the world of music streaming, licensing, and marketing. While not yet Spotify, Audius currently has more than 6 million unique users per month.

NFTs give artists more control

What is the real significance of music NFTs? At first glance, it is just another tool in the artist’s toolbox for creating collectibles, memorabilia, and merchandise, with the added flexibility of being software.

As Matthew Chaim points out, a subtle but important difference is that NFTs give artists control over the canon. Chaim’s argument is that NFTs simultaneously encompass three form factors: canon, collectible, and replica.

In this case, the canon is a representation of the record, or the source file for the internet. It’s also a collectible, just like any other limited-edition good. Crucially, the canon and collectible attributes are maintained even if millions of people circulate an exact copy on Spotify. In fact, the NFT becomes more valuable as more people listen to that copy. (This is a common rebuttal to the “right click + save” problem.) But unlike fine art, where only Mona Lisa-level pieces are widely seen, music is endlessly copied.

Owning an "Internet source file" of a song may seem trivial, it is not recognized by law, and there is no guarantee. However, if enough collectors believe that the NFT is a representative of the original, it does not matter. As Jesse Walden points out, once enough people think it is valuable, a unique NFT can even surpass copyright and accumulate more market value.

Outlook: How NFTs will change music

Technology has lowered the cost of recording, marketing and distributing music, which is beginning to tip the scales in artists’ favor. But in the age of streaming, true artist wealth remains elusive.

There’s a joke in the industry that record labels employ more lawyers than marketers. For record labels, it’s all about extracting the most value from copyrights. As we’ve said, NFTs offer a copyright-like expression, but without all the legal red tape. With NFTs, artists don’t have to worry about when they’ll get their check. Instead, its value is instantly determined each time it changes hands. Platforms like Catalog have begun to prove that the concept is feasible at scale.

Looking ahead, one area worth watching is incentives. An example here is the slice feature of Catalog, which was originally implemented on Zora. Through splits, bidders can create an advantage for the current owner of the NFT and offer a portion of the subsequent sale. This is influential because well-known collectors or investment clubs are more likely to take a chance on an artist, especially if their curatorial power can be financially beneficial later.

Meanwhile, Sound recently partnered with independent label Soulection to host a special episode of their popular radio show. Founder and legendary curator Joe Kay played a 62-minute mix in which he played unreleased songs from some of the label's artists and friends. After Sound's listening party, 333 NFTs were offered to collectors for 0.1 ETH. The special thing is that no matter how much money is raised, each transaction is automatically split and distributed to the artists whose songs are played in the mix. Using technology from 0xSplits, 20% went to Soulection+, 5% to Joe for curation, 5% to the project designers, and the remaining split was shared among the artists. All collections sold out almost immediately, raising 33.3 ETH (about $90,000) for participating artists.

But this is just the beginning of implementing smart incentives. It’s not hard to imagine NFTs being able to reward the earliest fans over the long term. Status indicators like limited edition music, VIP experiences, chatroom access, or community tokens can all be incorporated on-chain. It’s just a matter of establishing the rules in a way that’s popular.

As NFT technology develops, digital media is set to change dramatically. NFTs will be collateralized, they will earn royalties, they will act as licenses, they will represent early artist discoveries, and they will take on new forms. Right now, only a handful of household-name musicians are starting to take the plunge. But as more blue-chip artists begin selling music NFTs, this could soon become a market-stealing moment.

Summarize

If nothing else, the NFT craze of 2021 has proven that the cryptocurrency industry is a superior way to monetize digital media. It’s still early, and it may take a few years for the technology to truly disrupt incumbents in the music industry, but there is an air of inevitability.

Artists won’t put up with the current model any longer, and the movement is already starting to find momentum. For all their potential, music NFTs aren’t guaranteed to usher in a new middle class of artists. But for artists who lean into web3 communities, crowdfunding, and distribution, the results are promising. (Daniel Allan, for example, says he now makes 85% of his revenue from NFTs.) Moreover, as the data shows, having a large following isn’t a prerequisite for hits.

As our friends at Disclosure told us, "This is a game-changing moment for streaming, sales, and business. If you bring this technology into the mix, I think the music industry is going to have to adapt quickly."

By Nick Pappageorge, Delphi Ventures

Editor of this issue | Mary Ma Wu said that blockchain has obtained Delphi’s authorized translation