Introduction
In March 2021, the world saw the mainstream popularization of Non Fungible Tokens (NFTs) with NFTs of memes, music, and YouTube videos selling for millions of dollars. At the same time the idea of social tokens came to light and BitClout launched the first open-source blockchain to support social tokens. Since then, sales of NFTs and social tokens have cooled to more reasonable levels, but one might wonder whether they were a fad driven by the flywheel of social media, or if they provide enough substantial value to permanently alter how certain industries function.
Looking closer at the creative economy — which consists of musicians, fine artists, photographers, designers, and social media influencers — opportunities for innovation are evident, as the industry has operated in the same way since the term was coined in the 1980s (Gross, 2018). In the creative economy, creators generate works of art (which can be broadly defined as songs, videos, images, etc.) that provide emotional value to their community of supporters. Creators often need to sign with an agency that provides monetary funding and industry resources to support the production and distribution of their work. These agencies take a substantial cut of the artist’s copyright — on average about 50% (McDonald, 2021) — in exchange for the capital and intangible resources they provide. On the other side of the story, fans only encounter a limited number of opportunities to support their favourite artists. Fans can purchase event tickets, merchandise, and prints, however these must align with the fan’s personal schedule, geographical location, and budget. Looking at both sides of the story reveals that there are gaps in the creative economy that are ripe for innovation. Creators are looking for ways to retain the rights to their work while still having the resources needed to distribute it, while fans are looking to support their favourite creators in ways that are more consistent, repeatable, and accessible.
The craze for NFTs and social tokens witnessed in March of 2021 clearly demonstrated how both technologies can disrupt the status quo in the creative economy, and solve the needs of both creators and their communities of supporters. NFTs are digital tokens that can be thought of as certificates of ownership for digital or physical assets. Each time the NFT is sold, the transaction is recorded on the Ethereum blockchain. The Non-Fungible aspect of these tokens means that they represent unique units of value that cannot be exchanged for another token of equal value — unlike how a ten-dollar bill could be exchanged for two five dollar bills.
NFTs also feature the ability to be “smart” in the sense that they can encapsulate and facilitate terms and conditions that are attached to the sale of the token. Social tokens on the other hand are a type of cryptocurrency based around the value of a brand, community, or influence (White, 2021). Social tokens are considered fungible, as they can be exchanged for other coins that represent the same unit of value.
Re-Introducing Scarcity into Creative Markets
If we reflect on how we currently support our favourite creators, the need for NFTs and social tokens becomes apparent. Think about your favourite musical artists. You are typically drawn to music that provides emotional value — for example, specific music can help you focus during a workout.
The music fulfills the job to be done of invoking a particular emotional response, and creates an atmosphere that you crave. Companies such as BMW and Apple have been able to capitalize on the idea of emotional value to sell their products for a higher monetary value. This is done by using marketing strategies that leave you feeling as though you need the product to feel stylish and appear “technology forward” (Zorfas, 2012). However, in comparison, creators don’t have the ability to capture monetary compensation that is equivalent to the emotional value they provide due to the structure of the creative economy. You likely consume music through a streaming platform, which compensates artists with fractions of a cent for every stream.
The highest paying platform is Facebook at $0.05 per stream, closely followed by Peloton at $0.03 per stream (Trichordist, 2020). However, Facebook and Peloton are not the most popular platforms, which means their higher compensation rates aren’t helpful to artists. The top 5 streaming platforms, shown in Figure 2, account for 83% of all streaming traffic and all but one pay less than $0.01 per stream. This market concentration forces artists to release their work on these platforms in order to gain exposure, but at the cost of monetary compensation.
Let’s return to your favourite musical artist. You can support them in a limited manner through streaming their music, but what if you want to do more? You may tell your friends and family to help promote them, but this exposure also supports them in a limited way. If they happen to be on tour near you, you might purchase tickets and merchandise — if it aligns with your finances and schedule. Live events and merchandise are a main source of income for many artists, but they are limited by the items that fans are willing to purchase, the number of fans that can fit in a venue, and the inability to tour all year round. The structure of the industry is the same for photographers, YouTubers, and many other creatives who share their work on free or low-cost platforms in order to build a community of fans who will support them through monetized events, sponsorship deals, and merchandise (a16z, 2021). The ultimate goal for creators would be to find a way to match their compensation with the value their work provides. This is where NFTs can step in and help restructure the creative economy.
The current structure of the creative economy fundamentally creates a scarcity problem for creators. By making their work readily available on free platforms, their day to day work is no longer scarce and consumers are unwilling and unable to pay for work that is freely available. Instead, creators rely on a limited number of live event tickets and merchandise to generate scarcity and provide them with income. NFTs challenge this traditional structure by introducing scarcity back into the daily creative process, allowing creators to monetize their work, while still sharing it with fans in order to grow their community of supporters.
Over the course of the pandemic, EDM artist 3LAU (pronounced “Blau”) sold NFT rights to a collection of unreleased songs, fractional song rights, and unique video graphics for over $15 million. This was done without hosting a single live event, while also maintaining majority rights, and retaining the full monetization rights to his music. In comparison, 3LAU noted in an interview with the Morning Brew that he earns around $21,000 a month from the streaming of his entire released collection of music. 3LAU isn’t the only artist capitalizing on the opportunity that NFTs present, and although the craze that was seen in March 2021 has died down, artists believe that NFTs are the solution to equalizing the emotional value their work produces and the monetary value they receive in return.
A Shift in the Meaning of Physical Ownership
NFTs not only provide a way to monetize digital assets, but can also revolutionize the ownership of physical items such as art and clothing. The security and authentication that NFTs provide can also solve the issue of rampant counterfeit in physical art. The chief of the Fine Arts Expert Institute, Yann Walther, contends that 50% of works of art circulating on the market are counterfeit or misattributed due to the weak, manual authentication process. NFTs could protect the authenticity of the art by linking the physical artwork to the blockchain, which stores information in an immutable and transparent manner.
Each time the artwork changes hands, the transaction would be recorded on the blockchain. One physical asset being linked to NFTs is sneakers. In 2019, Nike successfully patented the tokenization of ownership for exclusive shoes (Andon, 2019). The purchase of these shoes will unlock digital tokens that will be linked to an owner using a 10-digit shoe identification code. The shoes and tokens will be collectively known as “CryptoKicks”. Since these NFTs are tied to the production of real shoes, this will ensure digital scarcity as well. Nike plans to integrate a procreation feature into CryptoKicks that will provide additional monetization opportunities for owners. This concept, similar to the breeding of NFT cats called “CryptoKitties”, will allow shoe-owners to intermingle one digital shoe with another to create a “shoe-offspring”, which can then be manufactured as a tangible pair of shoes. NFT sneakers can also provide a unique monetization opportunity for artists. For example, digital sneaker brand RTFKT (pronounced “artifact”) partnered with Fewocious to sell $3.08 million worth of digital shoes adorned in the artist’s colorful drawings.
A Path Away from the Middle-Man
The traditional path to monetization for creators within the current creative economy structure involves signing with an agency, label, or management team. This agreement provides artists with two essential resources: a well-defined and highly connected network to aid in advertising and distributing their work, and capital to fund the early days of their career (Grant, 2021). Depending on the industry, these agreements can be highly predatory towards emerging artists who are desperate to make it big. The fine arts and design industries provide what is considered a typical partnership agreement, where partnering with an art dealer, auction house, or corporate entity requires paying pre-defined fees and commissions. However, the music industry takes a more aggressive approach, where artists sign significant portions of their rights over to labels for the opportunity to participate in the industry. Record deals typically have three elements, the “rights” (the copyright to the master recordings), the royalty rate, and the advances paid to the artist (Bradley, 2020). A high profile example of these predatory deals is Kanye West, who signed what is considered a standard contract, giving the rights to his first 6 albums to Rock-A-Fella records in exchange for $2 million in advances and royalties between 14% and 18% (Bradley, 2020)(Grant, 2021). These albums would go on to reach platinum status, and be worth much more than the $2 million advance and royalties that Kanye received. This is only one of the highest profile cases that has been publicly disputed, and only demonstrates a subset of the challenges faced by up and coming creators.
NFTs and social tokens present new opportunities for creators to monetize their work while retaining their rights. Both technologies offer creators the two essential resources of distribution and capital, while foregoing the need for a third party management team or partnership. The need for a well-defined and connected network curated by a management entity is no longer required, as the internet and blockchain act as the intermediary between the artists and their supporters.
Additionally, through NFTs and social tokens, creators can access funds without selling the rights to the entirety of the work, as well as gain the opportunity to monetize on future sales through smart contracts.
Another area of the creative economy that NFTs and social tokens are poised to disrupt is the traditional form of advertising. Currently, artists rely on word-of-mouth referrals and media opportunities such as interviews, advertisements on streaming platforms, or being featured in ranking events (such as competitions or the Billboard Hot 100) to bring attention to their work. By allowing supporters to directly invest in their brand through NFTs and social tokens, creators could see a shift towards predominantly word-of-mouth advertising. This hypothesis is based on the theory of the Endowment Effect, a phenomenon in which people tend to place more value on something they own (Ethereum, 2021). According to the Endowment Effect, when a person invests in a creator — for example through NFTs or social tokens — they will believe more strongly in the artist than they did before, and are more likely to participate in peer-to-peer advertising. This creates an outward spiraling effect as more supporters invest in the artist, allowing them to fund more work more quickly with the influx of capital, and in turn increase the value of their brand by growing their collection of work and reaching a wider audience.
Expanding Relationships through Investment Opportunities
Beyond providing solutions to existing challenges in the creator economy, NFTs and social tokens could also add a new dimension to the relationship between creators and supporters. The first element that can be added to the creator-supporter relationship is the opportunity for supporters to gain monetary value from the relationship. Until now, supporters have traded monetary value for the emotional value that artists provide, whether it is paying for concert tickets, consuming ads on a streaming service, or purchasing books illustrated by their favourite comic artists. With the rise of NFTs and social tokens, supporters will be able to instantaneously invest in their favourite creator through an accessible means, with the potential to profit from the investment.
This relationship does exist in industries such as fine arts, illustration, and photography, where high-end pieces can appreciate in value over time. However, the investment opportunities are often limited to those with specific financial and networking means. NFTs and social tokens expand this opportunity to any industry and supporters of all financial means.
NFTs and social tokens also present the opportunity for creators to expand the means by which they connect with their audience. An NFT can be multipurpose such that it can act as a back-stage pass, or be viewed as a collectible to prove you were at an event years down the road. Creators aren’t bound to simply selling the rights to their work through NFTs, or tracking the value of their brand through social tokens, rather they have the freedom to be creative in how they deploy these technologies to best capture their audience. The top creators on BitClout have already started capitalizing on the opportunity to provide unique incentives to their supporters. @jakeudell held a banquet feast for his top coin holders, while @craig hosts private calls with his top 25 shareholders (Kamel, 2021). In the future, these opportunities could expand to the equivalent of collecting memorabilia, except the blockchain would track the exact history of the memorabilia, denoting the user who unlocked the memorabilia and how many times it passed hands.
The Next Steps for NFTs and Social Tokens
In theory, NFTs and social tokens seem to solve a number of problems that exist in the creator economy. However, there is one question that needs to be answered before a shift to NFTs and social tokens can occur. How do you make these technologies accessible to the general public?
Right now, the process of purchasing NFTs and social tokens relies heavily on having knowledge and confidence in operating on the blockchain. Even BitClout, which claims to be accessible to anyone who is looking to invest in mainstream social media influencers, has only recently allowed the direct purchase of coins using USD through Wyre (Goldberg, 2021). Artists who are heavily invested in the future of blockchain in the creator economy, like 3LAU, have started working on platforms to seamlessly facilitate the purchase of NFTs and social tokens. An early example of this is an application built by 3LAU’s team that leveraged QR code technology to facilitate transactions, and was available at one of his pre-pandemic events (Grant, 2021). Early adopters like 3LAU have already started working on solving the problem of mainstream accessibility, and as the popularity of NFTs and social tokens rises, knowledge, financial resources, and human capital will become more readily available to solve these problems. Signs of this innovation began to emerge in July of this year when NFT startup Bitski held a hybrid gallery to display their digital-wallet-as-a-service technology and “Shopify-like experience”. Bitski aims to give creators the tools they need to mint and sell NFTs through their own storefront. Based on the current outlook of how NFTs and social tokens could change the creator economy, the ultimate goal would be to allow supporters to click on a link and invest in their favourite influencer or musician right from the content they are viewing on TikTok, YouTube, Spotify, or any brand website.
Conclusion
Many may argue that the NFT craze that took place in March of 2021 was a temporary fad that has since expired. However, through exploring how NFTs and social tokens could play a role in the creator economy, it has become evident that these technologies are more than just a fad. Rather, NFTs and social tokens present the opportunity for better monetization of artwork by increasing scarcity and equalizing monetary compensation paid with the emotional value provided through creating investment opportunities for supporters. Additionally, they could provide a solution to the long-standing predatory behavior of record labels and management groups that prey on artists looking for a way into the industry. NFTs and social tokens could provide artists with the two fundamental resources they need — a distribution network and capital — while allowing them to forego the loss of rights and compensation. Finally, NFTs and social tokens open up a new dimension to the creator-supporter relationship, by allowing supporters to directly fund their favourite artists and participate in new experiences. Although the creative economy does face the challenge of making complex blockchain technology accessible to the masses, this is a challenge that is already being tackled by some of the most progressive artists in the industry, and with time and trial-and-error, a solution should emerge in the near future.