While cryptocurrency, NFTs, DAOs, blockchain and Web3 are hot topics in the music industry, they are complex concepts to grasp, and even some entrepreneurs in the sector have difficulty explaining them cogently. Here are some commonly used terms defined and frequently asked questions answered.
Blockchain A digital, time-stamped, theoretically hack-proof public ledger that records and distributes all transactions among a decentralized system of computers. In the music space, blockchain is a way to transfer non-fungible tokens, music, collectibles and royalties, among other transactions, without the interference of a central authority (like a government or financial institution). Each block stores information and, once filled, is closed and unalterable. Information that modifies that block — such as the name of the purchaser of an NFT or a change in contractual terms — is added to a new block, which is then linked to the previous block.
Cryptocurrency A digital currency that is verified and recorded using blockchain technology. Cryptocurrency can be fungible, such as bitcoin or ethereum, or non-fungible, such as an NFT. In the music industry, fungible forms of crypto are being tested for royalty payments and advances — in November, EMPIRE paid a $1 million advance to the Atlanta artist Money Man in bitcoin — and artists are using NFTs in rapidly expanding ways, including to sell limited-edition merchandise, tickets, VIP experiences and more.
Decentralized autonomous organization DAOs are communities of people who make decisions collectively without a conventional centralized structure of authority such as a corporation or government. Within them, all decisions are transparent and some procedures are automated using Web3 technology. The hope is that all members of a DAO have some level of say over the organization’s decisions. DAOs reject the typical hierarchical structure of modern companies in favor of an egalitarian approach. (See FAQs below for an example of how a DAO is used for music creation.)
Defi Shorthand for “decentralized finance,” they are financial transactions that do not include middlemen like banks or governments, or in the case of the music industry, may bypass the need for labels, publishers or performing rights organizations. Instead, the transactions are between individuals and governed by smart contracts. For example, royalties from a fan’s purchase of an album sold as an NFT would go directly to the creator, without first being collected and then distributed by a publisher or PRO.
Initial coin offering The crypto equivalent of an initial public offering, it is the process in which funds are raised for a new cryptocurrency venture. Typically, investors receive tokens in exchange for their monetary investment.
Interoperability The ability for blockchains created by two different entities to interact with each other. Web3 experts say that when interoperability is achieved, blockchain will become a feasible replacement for current internet standards, greatly increasing its potential for the music industry.
Mining The process in which a cryptocurrency transaction is validated between many computer systems. Ideally, this mining process could someday allow an artist to collect performance royalties, for example, from venues and broadcasters directly and securely without the need of a PRO.
Non-fungible token NFTs are collectibles that are bought and sold using blockchain technology. These collectibles can range widely from a digital piece of art to a concert ticket. While bitcoin would refer to a fungible (exchangeable) coin being sent from one person to another securely, NFTs refer to any item that can be sold through blockchain that isn’t easily swappable. The concept of selling concert tickets as NFTs has been explored as a way to curb ticket scalping by tracking sales and adding resale price limits to the NFT blockchain. The opportunities for NFTs in the music business are continually expanding as the technology evolves.
Smart contract Computer code that will automatically execute specific protocols and agreements. They are stored on blockchain and could automate the complicated, sluggish process of royalty payments in the future.
Stablecoin Cryptocurrencies backed by fixed assets, such as government-issued currency or gold, that protect the currency from major fluctuations in value. Most cryptocurrencies are stablecoins and include USDC, USDT and DAI, which are all tied to the U.S. dollar.
Trustless A “trustless” system means that the parties involved do not need to know or trust each other, or to trust a centralized authority, for the transaction to work.