Three letters have been repeatedly popping up in the arts and entertainment section of the news recently: N, F, and T. Everyone seems to be talking about them, but what do they mean, and why might they be the future of music collecting?
NFT stands for non-fungible token, a form of cryptocurrency exchanged on the blockchain. If most of that last sentence sounds to you like a foreign language or like something out of a sci-fi movie, you’re not alone. To explain it concisely, the blockchain is essentially a virtual bank that has no centralized location and keeps track of transactions on virtual ledgers. Unlike a physical bank, the blockchain’s ledgers are publicly available, and entries can be confirmed by anyone. An exchange on the public ledger is protected through cryptography and can be confirmed through “mining” — crunching numbers and solving formulas to verify the coded transaction, which if successful, mints new currency.
Most NFTs today are exchanged using the Ethereum blockchain, using the same encryption system that the currency uses. Unlike cryptocurrency, such as Ether or Bitcoin, an NFT is a unique digital entity or “token” that cannot be exchanged for anything of equivalent value. In other words, it is “non-fungible,” or not exchangeable. Conversely, an example of a fungible token would be an Ether coin, because one coin can be exchanged for another.
A token can be bought with a currency that shares the same blockchain. Think of an NFT like a favorite pair of sneakers. There are probably thousands, or tens of thousands of the same pair of shoes in the world, but none of them would be the exact same pair with the same scuffs, tread wear, or other unique characteristics. An NFT can be anything that can be represented digitally, such as a virtual pair of sneakers.
To clarify, the code on the blockchain that comes with an NFT is like a certificate of authenticity that accompanies any collector’s item, whereas the digital object or file takes the place of the physical item itself. So what does this mean for musicians and the music industry?
Recently, big-name artists, especially EDM and hip-hop musicians like Steve Aoki and 3LAU, have made headlines for selling their music as NFTs, sometimes with accompanying visual elements. These NFTs can generate huge swaths of money in the form of cryptocurrencies, which the artist can then exchange for conventional money. When these tokens are sold, the purchaser owns the audio file (and other media), in the same way that a CD or a record can be owned.
This is a revolutionary concept for musicians who in the last decade or so have been stuck having to share music on streaming platforms for free or very low profit, usually at the hands of third-party distributors.
In today’s world of digital music consumption, artists can be challenged to turn a profit. Streaming services pay a small fraction of what physical formats would for the same content. For example, revenue for a stream on Spotify varies between one third and half a cent, whereas a 10 track CD might sell for $10, about a 2,000% profit difference, not taking production or publishing costs into account. Although most musicians would agree that modern streaming services are valuable for promoting their work, it is nearly impossible to rely on them as a significant source of income.
The appeal of NFTs is that artists can set their own price and make 100% profit from their work without a third-party broker. NFTs can also be resold in the same way as a second-hand vinyl record, but when an NFT is resold, the transaction remands a portion of the sale to the artist, further boosting the creator’s income.
Although the media hype around NFTs may make them seem like a fad, more and more artists are jumping on board every day with the hope of finding a new source of income. At the moment, most NFTs are being sold for tens, thousands, or even millions of dollars through auctions on marketplace sites like Nifty Gateway. But the tokens can theoretically be sold wherever cryptocurrency is accepted and at whatever price the artist sets. In the near future, once the news cycle moves on to another new trend and demand drops significantly, NFTs will hopefully be accessible to anyone who wants to support their favorite musician.
Like most innovations, this new digital market comes at a cost. One estimate currently shows the entire Ethereum blockchain using 41 TWh of electricity annually, the same amount of power consumed by the entire country of New Zealand. Every Ethereum transaction or sale of an NFT currently uses about the same amount of power as an American household consumes over two and a half days. This is because the number crunching mentioned earlier uses a lot of computing power — think rooms or warehouses dedicated to computers.
The power consumption of trading virtual art can have real-world effects on the climate and harshly contradicts the goals of many companies for reducing emissions in coming years. Fortunately, Ethereum developers have announced that they will drastically reduce energy consumption. These cuts are already being tested through Ethereum 2.0, which uses a new method of confirming transactions called proof-of-stake. This method is designed to limit computational needs and reduce overall energy use.
The popularity of NFTs reveal the desire for a more dependable source of income for all artists. For musicians, they also lessen the need to rely on current streaming services. Assuming that energy consumption and climate impacts can be managed soon, NFTs can be the next logical step for music collecting.