The Rise of Non-Fungible Tokens (NFT) and their Impacts on the Music Industry

When one buys an expensive Rolex watch, you may be greeted by one of its signature green certificates of authenticity that shows the style and serial numbers of its dial and bracelet. This card should always accompany the watch wherever it goes and be transferred to a buyer when the watch is concurrently sold. If the card were to be lost, it might be challenging to prove the watch’s authenticity. From this example, one can derive that the institution’s authenticity certificacte is often more valuable than the object itself. Non-Fungible Tokens serve this role to the underlying asset. NFTs are digital certificates that can help identify and differentiate items and qualities using smart contracts.

Definitions

The “Fungibility” in the “Non-Fungible Token” refers to the ability of a good or asset to be interchanged with other individual goods or assets of the same type (Iredale). Fungible assets simplify the exchange and trade processes, as fungibility implies equal value between the assets. An NFT, in this case, does not hold equal value to another NFT, even if it is issued within the same collection or group.

For lack of a better term, smart contracts are software programs stored on a blockchain that transact if conditions are met. Unlike actual contracts, smart contracts do not operate on trust and the word of the counterparty, but rather a simple “if, then” program that follows the rules of permission-less, verifiable and definitive nature of the blockchain. This omits the need for an external court system to enforce these contracts; as a result, they do not necessarily need legal language in the first place. Many critics mistakenly argue that smart contract errors may incorrectly execute the code, causing irreparable damage; however, if one were to look closer, it ends up being a human error for a mistype or omission. Human errors, therefore, can and should be corrected instead of looking for faults within the technology itself.

ERC-721 and ERC-20 Technical Standards

NFTs were created by the ERC-721 technical standard of the Ethereum blockchain. As Bitcoin is widely known as a simple store of value via permission-less ledgers using the blockchain, Ethereum offers greater functionality and is more akin to a peer-to-peer computer than a simple ledger. Written with Turing-complete language, Ethereum allows developers worldwide to utilize the shared blockchain space that is the Ethereum blockchain and add functionality to it. One of the standards earlier than ERC-721 is the ERC-20, which allowed users to create their own token with the ERC-20 standard. ERC-20 tokens can serve various functions, including governance, staking, and other specific utility purposes to the underlying service. ERC-20 tokens are also fungible blockchain-based assets. Common ERC-20 tokens include Chainlink (oracle data solutions); Uniswap (governance for decentralized exchange); Tether USDT (stablecoin); or even Wrapped Bitcoin (A representation of Bitcoin ownership on the Ethereum blockchain).

ERC-721’s implementation in 2018 created distinguishability amongst tokens, much like “all houses are distinct and no two kittens are alike.” In the original proposal, the authors drew examples of NFT usage, including, but not limited to: physical property (houses, unique artwork); virtual collectibles (unique pictures of kittens, collectible cards), and “negative value” assets (loans, burdens, and other responsibilities). Because all this code is open source, all NFTs today are built upon the same language as the original ERC-721 proposal, with modifications to suit individual needs.

NFTs as Physical Asset Ownership

At present, the transfer of ownership over physical assets such as copyright or real estate is labor-intensive and time-consuming. A typical deal would involve attorneys, bankers, notaries, escrows, and other intermediaries to ensure a trustworthy deal. While there is a need for legal preparations to bind the asset with an NFT for the first time, subsequent transfers of the NFTs can be done seamlessly and at a fraction of the time and cost. (It is to be noted that owning an NFT does not imply the ownership of the intellectual property unless specifically bound by actual life legal preparations.) NFTs also help prevent overlapping copyright claims.

Though the precise licensing language is not prevalent, royalty payments and licensing options can be coded into smart contracts. Regardless, these are new ways for publishing companies to protect and monetize their intellectual property (IP) in a secure and verifiable way. As mentioned, NFTs verify ownership, thus by extension, copyright law applies in full force to any asset held in ownership of the NFT. That being said, one of the more promising new ways of fractionalized and decentralized ownership of NFTs is the ability to allow fans to invest in the copyright directly and gain proceeds to the song revenue.

Another common idea that developers are experimenting with is to create a token for streaming. This could potentially be done by issuing an ERC-20 token (fungible tokens) that have the utility to play the ERC-721 (NFT) asset.

NFTs as Collectibles

As the blockchain and NFT technology provides creators with an opportunity to engage closer with their fanbase, NFTs serving as collectibles are maturing much quicker. Universal Music Group’s brand and merchandising company, Bravado, has recently signed a deal with graphic design company Ikonick to license NFTs to merge the physical and digital world and create long-term resell value for collectors and fans. Collectibles are defined by their scarcity, rarity, and condition. In the digital world, NFTs are non-perishable and thus will not erode in condition. The other two factors are the main driving force for dealing with NFTs as collectibles. Limited edition albums, historical performance tickets, and antique memorabilia are only a few of the many mediums garnering widespread collectors’ fervor.

Experimental audio and music creators are also venturing into this space courageously, with various experiments of zip files that are only unlocked after the purchase of NFTs; sound snippets that integrate with gifs and images; long-tail generative algorithmic music (derived from generative artwork mediums); and many more.

The Legality of Smart Contracts

It is a standard topic amongst law enthusiasts and tech attorneys on whether or not the court of law can recognize smart contracts and what sort of language would assist them to be recognized. However, the better question to ask is whether or not smart contracts require the legal system to mediate and enforce it in the first place. If smart contracts can exist and perform their purpose, then no jurisprudence would aid or hinder its ability to operate.

That being said, laws should continue to be in place to govern human behavior through the medium of a smart contract. Malice and human error should still be legally trialed, but contract law is not applicable because there is no situation where a breach of contract would occur. As a function with a simultaneous and instantaneous settlement, smart contracts do not pose an opportunity for trust, promise, or credit, and by extension, any opportunity for abuse or misinterpretation.

Limitations

NFTs, as with any emerging technology, faces a lack of infrastructure and vocabulary compared to a more mature system, in this case, digital jurisprudence and contract law. Some of these limitations include fractionalization of NFTs and bridging of physical assets to the digital NFT.

Many songs may not only be owned by one party or from one organization. They may include multiple publishers and songwriters, resulting in ownership and copyright split between multiple people. While there is not a complete split sheet for musicians on the blockchain, multiple experiments exist with fractionalization of NFTs, such as fractional.art, which has begun offering a minority stake in ownerships of expensive NFTs like Crypto Punks. The platform has only existed for less than two months, showing the nascent stage of NFT development.

Bridging physical assets to the blockchain is also a complex problem to solve. Moreover, who is to say one owns the NFT? There have been cases of artists having their NFT artwork sold without their permission. In this case, there may be multi-pronged solutions offered. For example, Chainlink is a decentralized oracle network token that provides offline API data on the blockchain and makes it readable by smart contracts. On the other end, there should be legal preparations to protect the legality of the initial mint. And as expected, it would probably take a couple of years (if not decades) for legislatures worldwide to adequately address this issue.

Regardless, it is essential to recognize the revolutionary benefits it could bring and look past execution obstacles, much like the internet was two decades earlier.

Conclusion

NFTs represent a new era of asset ownership both in the physical world and the metaverse. However, much remains to be discovered in the years to come. As a fledgling asset class that took off in early 2021, NFTs give us a peek at what lies in the future.

Bibliography

Martin, Brittany. “Can Stevie Nicks Stop Dogface from Selling an NFT?” Los Angeles Magazine, March 22, 2021. https://www.lamag.com/article/nft-law-copyright.

Danielle. “Can NFT’s Be Used for Real-World Assets?” Blockchain Collective, July 26, 2021. https://bccollective.io/can-nft-be-use-for-real-world-assets/.

Shafer, Elise. “Ikonic Signs NFT Licensing Deal with Bravado, Universal Music Group’s Merchandise Unit (Exclusive).” Variety. Variety, June 8, 2021. https://variety.com/2021/music/news/ikonick-bravado-nft-licensing-deal-universal-music-group-1234990543/.-nft-licensing-deal-universal-music-group-1234990543/.

“This Is Bluebox.” Bluebox. Accessed November 25, 2021. https://www.bluebox.info/.

Richard, Isaiah. “Omni to Launch Celebrity NFT Art Featuring Jay-Z, Taylor Swift, Elon Musk, and More.” Tech Times, August 21, 2021. https://www.techtimes.com/articles/264359/20210820/omni-launch-celebrity-nft-art-featuring-jay-z-taylor-switft.html.

Zarczynski, Andrea. “How DJ Steve Aoki’s NFT Launch Is Shaping Future Music Collaboration.” Forbes. Forbes Magazine, April 28, 2021. https://www.forbes.com/sites/andreazarczynski/2021/04/27/how-dj-steve-aokis-nft-launch-is-shaping-future-music-collaboration/?sh=5adc68a31f80.

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