Tech

NFTs Are Booming and the Music Biz Desperately Wants In

Pete Gamlen

In the past two weeks, digital non-fungible tokens have grown from a niche interest to mainstream million-dollar sales.

“It was one of those moments in my life where I was like, 'Holy shit,'" recalls DJ-producer 3LAU, “‘I think we just changed everything.'"

That holy-shit moment, shared by most of the music business, was his Feb. 25 auction of 33 collectible NFT — non-fungible token — versions of his 3-year-old album, Ultraviolet, that sold for $11.7 million (one NFT went for $3.6 million) — which included vinyl, unreleased music and the chance to record with 3LAU. That’s real money for a virtual good, setting a record for the primary sale of an NFT collection at the time and making history as the first album to be tokenized.

Music creators and executives seem to agree that something has changed — even if they don’t entirely understand it. Deadmau5, Grimes and Shawn Mendes have already sold NFTs — although not albums — following the lead of digital artists like Beeple, who has generated nearly $80 million auctioning off NFT artwork since December, with a piece of digital art on auction at Christie’s selling for a record $69.3 million on March 11. So far NFTs are popular mostly among people who are interested in cryptocurrency, but are quickly becoming mainstream: In October, the NBA, in partnership with Dapper Labs, launched an NFT marketplace called NBA Top Shot where it sells clips of highlights and accepts credit cards, not just Ethereum. Footage of LeBron James dunking sold for $208,000 on Feb. 22 and the platform has processed over $250 million in sales in the past month, according to The Wall Street Journal.

An NFT is a one-of-a-kind cryptographic token that exists on a blockchain, typically Ethereum, the second-most popular cryptocurrency after Bitcoin. Blockchains are immutable digital ledgers that allow NFTs to be tracked across the internet and makes it possible for anyone using the same blockchain to verify their authenticity.

Essentially, that makes the NFT a digital collectible that serves as its own proof of authenticity. The media involved can be copied — anyone can hear Ultraviolet — but the NFT is unique. To collectors, it’s the difference between a picture of a famous painting and the actual painting itself. In terms of value, the NFT brings scarcity to the digital world.

NFTs also let creators control digital works through “smart contracts,” lines of code that automatically execute behaviors such as giving the creator a resale royalty when it’s sold to another buyer in the future. “You can set that permanent resale royalty at the time of minting,” says Dee Goens, co-founder of the NFT marketplace Zora, noting that a royalty range of 10% to 25% is typical.

“The problem with the digital world is we’ve been trained for a decade that everything is just copyable,” says 3LAU, a longstanding member of the crypto community. “There has always been a historical culture of collection when it comes to art that just hasn’t manifested in a digital way.”

A creator who wants to sell an NFT first needs to “mint” one, which involves uploading the media and setting the rules in a smart contract. It also requires paying for “gas,” the fluctuating price for writing data onto a blockchain. “It costs $30 to $50, depending on what gas prices are, to mint an NFT,” says Mike Darlington, founder/CEO of the electronic music label Monstercat. (Environmentally friendly artists, beware: The Ethereum network alone annually uses as much power as Ecuador.) Once minted, an NFT can be sold in a "drop" — vernacular adopted from the sneakerhead community — on marketplaces like OpenSea, Zora and Nifty Gateway, where some of the biggest NFT collectors have congregated.

NFTs have been traded online since 2017, but they’ve captured the interest of the music business over the last few months. In December, deadmau5 announced he would sell virtual stickers and trading cards with animations of his iconic mouse helmet. After selling an “audiovisual collaboration” with augmented reality artist Sutu depicting a golden version of Deadmau5’s helmet floating in a space station on the moon Titan in a 30-second loop, deadmau5 teamed with digital artist Mad Dog Jones on another NFT auction that showed the benefits of a royalty on third-party sales.

"With Mad Dog Jones, we did $420,000 in 15 minutes," says Dean Wilson, deadmau5’s manager and founder/CEO of management firm Seven20. "Two weeks later, Mad Dog Jones does his own drop. He clears $4.2 million. In the same week, for our art that we did with him, we alone got paid $22,000 on the secondary market."

On Jan. 27, Monstercat became one of the first labels to release an NFT, taking in over $500,000 in a pair of drops with the producer Varien and digital artist Giant Swan. Mendes brought in $600,000 for his charitable foundation in February with a collection of NFT wearables for digital avatars. On Feb. 28, Grimes auctioned 10 pieces of digital art featuring original music that collectively pulled in over $6 million. On March 2, the members of Disclosure live-streamed themselves producing a song on Twitch, minted it as an NFT and sold it for $69,000. And on March 5, Kings of Leon earned $2 million with NFT collectibles, including the band’s new album, When You See Yourself, with a portion of proceeds going to Live Nation’s Crew Nation Fund.

Even with 3LAU’s success, questions remain about the viability of selling albums as NFTs. The price of gas makes it hard to sell music at scale, and it’s far less convenient to listen to than Spotify.

“I’m not the biggest advocate for straight music NFTs,” says Darlington. “It feels like we’re going back in time, like owning MP3s and trading MP3s. I think it's going to be more of an uphill battle to sell straight music.”

Right now, “the NFT business is a collectibles business,” says Wilson. “What we’re seeing is a hype moment like when dot-com businesses boomed and then busted. There will be a boom where everybody thinks there’s a gold rush and there’s free money out there, and then the collectible businesses will come out the back of this hype. It’s taking the baseball card mentality of collectibles into the digital space.”

So far, NFTs aren’t easy for ordinary people to buy. Prices are out of reach for most music fans, and most marketplaces only accept payment in Ethereum. Alongside NBA Top Shot, NFT marketplace Nifty Gateway accepts credit cards, but the market won’t grow significantly until more sellers and buyers better understand how it works. (A fact made clear in Kings of Leon’s NFT drop, which didn’t sell as quickly as expected.)

“We’re dealing with a moment of clear digital divide where people are illiterate to how technology works,” says Daouda Leonard, Grimes’ manager and founder of the firm CreateSafe. “I’m seeing a lot of people just going after the gold rush, wanting to get in and sell NFTs, and not doing the work and figuring out how these things work.”

If music NFTs become popular, they will also raise additional questions — whether artists who don’t own the rights to their recordings will be able to sell an NFT without permission from labels, what kinds of royalties labels might pay artists when they sell an NFT and what kinds of licenses buyers will need to display their collections online.

"We’re entering a new era of accounting that nobody’s ready for," says Darlington. "None of the publishers are ready, none of the collection societies are ready. The technology is going to far surpass the systems that we have in place."

A version of this article originally appeared in the March 13, 2021, issue of Billboard.