Music NFT contract template V2: Off-chain benefits

By: The Water & Music community

Published: 2022-06-15

tl;dr: In response to growing demand and market activity, we’ve updated our music NFT contract builder to include off-chain, IRL benefits around merchandise and access, which comprise some of the fastest-growing forms of utility around music NFTs. We define merch utilities as physical or digital collectibles, such as posters, apparel, or other NFTs (i.e., digital merch). We define access utilities as those that provide IRL experiences upon redemption and, in their redemption, require the physical or digital presence of the redeemer. Examples of access utilities include in-person meet-and-greets, access to Discord servers, or exclusive Zoom sessions with artists, among others.

This research and development builds off of our Season 1.5 research on music NFT legal agreements, which was first published in March 2022; you can read that here.

The GitHub repository for the contract template is also available here, under an MIT license. We’d encourage you to adapt and integrate the to your project or platform however you’d like!

The concept of “utility” — any measure of value that collectors derive from owning an NFT — provides an essential baseline for artists when developing NFT smart contracts. Establishing utility in a smart contract raises various questions for the artist to consider:

These sample questions provide only a glimpse into the profoundly nuanced thinking that different artists might use when approaching utility. As we’ve covered in our recent research, artists are continuing to experiment with the ever-growing possibilities of short- and long-term value they can offer through NFTs and other Web3-native formats.

Against this backdrop, we’re thrilled to share the latest update to our music NFT contract template, which we first released in March 2022 as the first-ever interactive tool to stem from our music/Web3 research efforts. Due to legal complexities that we addressed in our accompanying launch article, V1 of the template covered only one limited use case for NFTs: Audiovisual music artworks with the minting artist owning 100% of the underlying works (both the song and the visual art).

For V2, we’re excited to add contract language to incorporate one of the fastest-growing forms of utility around music NFTs: Off-chain, IRL benefits around merchandise and access. To accomplish this, we collaborated with several lawyers and music-industry professionals in the Water & Music community to study the state of off-chain benefits in the wider music/Web3 market, including in-depth analysis of existing user agreements and terms of service. The result is a new set of contract language to cover these benefits — much of which we had to draft from scratch, given how nascent the landscape still is.

You can access our updated music NFT contract template here.

Why off-chain benefits?

Off-chain benefits for NFTs have already emerged in various forms. From early iterations like Kings of Leon’s “complete merch set(s)” and Snoop Dogg’s “swag bags” to Vérité’s lifetime ticket NFTs, artists have been at the forefront of experimentation for off-chain NFT utility. As the benefits expand and music/tech companies like Venice Music issue membership NFTs with a range of off-chain perks, we felt it imperative that this new contract builder update give artists the ability to include this functionality in their releases.

In our early exploration of fan onboarding in fall 2021, we saw that external in-real-life (IRL) benefits correlate with higher fan engagement and NFT sales. And yet, the terms of service and language we observed around these offerings were highly inconsistent. One artist in the W&M community informed us that the execution of these benefits was sometimes difficult and costly, both in fan confidence and in dollars.

We hope the language in our NFT contract update, and with this accompanying article, serve as a resource for artists and their teams as they continue to explore the infinite permutations of benefits they can make available to fans. That said, given the growing diversity of IRL utility associated with the sale of an NFT, it is near impossible to ensure that our NFT contract template builder captures every possible use case perfectly. There will always be edge cases that require unambiguous, detailed contractual language, and many IRL offerings will include unique elements best addressed with a customized approach. For this reason, we would like to reiterate that this tool is not legal advice, and we remind all users to consult with a lawyer on their projects.

Nonetheless, to provide a basic contractual language template around IRL benefits for NFTs, we’ve separated potential IRL utilities into two distinct categories: MERCH and ACCESS. Distinguishing these groups allows us to provide broad language covering the utility deployed  across music NFT marketplaces to date; said language may be tailored further by individual projects to meet the specific utilities included with their NFT project.

We define MERCH utilities as physical or digital collectibles. Examples of MERCH utilities include:

We define ACCESS utilities as those that provide IRL experiences upon redemption and require the physical or digital presence of the redeemer. This category does not include concert tickets or other traditional “ticketing” applications that require coordination with another third party, like a venue or tour promoter. Examples of ACCESS utilities include:

Both categories present specific legal and contractual challenges reflected in our template language. These problems raise questions that require a thoughtful approach and clear contract language, to ensure that all parties to a given contract are protected.

Methodology

Our approach to adding this new functionality to the contract was similar to how we approached V1 of the original template. To begin, we reviewed what artists and others were doing with off-chain benefits for music NFTs and analyzed how they approached these projects. Then, we identified the most relevant projects to provide adequate examples. They were:

These drops were beneficial because they were simultaneously comprehensive and high-profile, highlighting that a mix of Web2 and Web3 solutions is probably the best strategy in terms of surface-level sales numbers. That said, surprisingly, we could find minimal legal language written around any of the projects we researched. Bringing legal structure to the Web3 world always involves creative lawyering, but it was particularly evident here — ultimately forcing us to develop most of the language we used from scratch, which is unusual. In highlighting these challenges, we don’t intend to criticize the projects we analyzed, but instead hope to broaden the wider Web3 discourse in setting legal-language standards, in recognition of the current state of the industry.

Why we are not including live events in the template (for now)

A notable omission from this iteration of our contract builder template is the absence of functionality for ticketing.

We did study several live-events use cases around NFTs as part of our research, as the utility is becoming more common in the music industry at large. Individual artists are experimenting with bundling tickets and live performance perks with NFTs, while major entertainment companies like Ticketmaster are beginning to test the market for NFT-based ticketing solutions. You will see a handful of instances of live-event NFTs cited throughout this article.

That said, as we continued exploring this off-chain benefit, we realized that the ecosystem around live ticketing via NFTs is still nascent and evolving, and comes with both logistical and technical challenges. Questions remain about the best technical practices for enabling redemption of these kinds of benefits. For example:

Ultimately, we decided to omit the NFT ticketing use case from V2 of the contract template as a whole, due to the above complexities. That said, we will continue to track the evolution and implementation of this use case across the music industry, and monitor as standards and best practices solidify to include them in future versions of the template. If you’d like to help us update our template to accommodate these scenarios, we would love for you to join the Water & Music community and let us know.

Implementation challenges and observations

Before offering IRL benefits in music NFTs, artists must consider how they will keep their promises to their fans (whether they implement Web2 or Web3 solutions). When packaging off-chain benefits with digital collectibles, transactions require significant trust between buyers and sellers — perhaps contradicting the “trustless” ideal that many developers aspire to with blockchain technology.

Our contract language provides a broad roadmap and starting point for addressing these issues. However, we ultimately concluded that the responsibility for ensuring these benefits rests with the artist and their team, especially across the following variables:

Customer/fan support

When considering customer support, there are decades of music-industry practice and standards around artists selling “merch” and “access.” Standard support channels like email, phone/SMS, and online chat are par for the course with other digital fan experiences, and should remain open throughout an NFT drop’s lifecycle. In terms of setup, this may not require too much heavy lifting; in all likelihood, buyers will go to an established website where merchandise is already available, and where there will be a point of contact for troubleshooting.

We will not get into the basics of fulfillment in our contract template. We will, however, cover what is different when integrating an NFT into the fulfillment process. We believe the artist should provide an email address at minimum as a designated channel for NFT-related customer support, especially in the case where a buyer of an NFT has trouble accessing an experience that they bought access to through the token. For instance, Coachella provided a contact email to everyone who purchased tickets via NFTs for post-purchase inquiries. This solution may be considered low-tech, but it is easy for consumers to use and understand in an already novel process.

Off-chain fulfillment

Given the potential for secondary NFT sales, artists assume the new responsibility of tracking fulfillment for NFTs that come with off-chain benefits. For example, if an NFT allows the buyer to claim one hoodie and two shirts, the hoodie may have been claimed by a certain date, while the shirts have not. The artist needs to make this information available for buyers on the secondary market. Otherwise, an NFT may sell again under the pretense of claimable merch or access. This example further supports providing a designated email for NFT-related inquiries. The artist is also responsible for alerting fans when merch or access perks associated with an NFT are “sold out,” or if the offer expires.

Much of this communication around fulfillment is still happening off-chain. For instance, to offer NFT holders lifetime tickets to her shows, Vérité’s team asked buyers to reach out to her manager, who put them on the guestlist. This manual process, while effective, could be inefficient given differing rules between guest lists from venue to venue. As an example of on-chain fulfillment tracking, the IlluminatiNFT project has set up a database where potential buyers can enter in the token ID of an NFT to see the status of a claimable NFT benefit.

Expiration dates

One method that we’ve seen in select music NFT projects to help with managing off-chain benefits is setting an expiration date for claiming said benefits, to avoid untenable fulfillment expectations for future buyers. When Vérité released an NFT that included a physical cassette tape, her team set a final claim date, and informed fans that the cassette was attached only to the original sale. Then, she announced a snapshot of the smart contract at a specified date and time. To claim the tape, buyers had to acquire the NFT before the snapshot, after which the benefit attached to the NFT would no longer apply to either primary or secondary buyers.

Delivery and redemption mechanics

When integrating NFTs into the merch process, one nuance is that the artist needs to clarify whether they are asking for their physical or crypto wallet address. Most of this information should be in the claiming instructions for the NFT – usually included in the description field when the NFT is purchased. Artists should communicate across as many channels and clearly as possible the mechanics of their offering.

For example, the Kings Of Leon drop offered a long and seemingly impressive list of some great utilities alongside their Golden Ticket NFT including but not limited to:

If your eyes glazed over a bit, reading everything down, you’re not alone. It’s a lot of information — and all without mentioning a customer support channel anywhere.

Five methods for proving NFT benefit redemption

Based on our research, several on-chain mechanisms can help prove the redemption of off-chain NFT benefits.

Burning an NFT requires the artist to create separate tokens for each benefit. The token is destroyed or “burned when that benefit is claimed.”

For example, when a collector claims tickets using their Kings of Leon NFT, the NFT is burned and replaced by a new NFT (with different artwork) via automatic airdrop to the buyer. This burn-and-replace method shows subsequent buyers in the secondary market that a previous owner exercised the ACCESS utility.

Counting involves tracking the quantity remaining in the smart contract. This method keeps track of each benefit and NFT in an on-chain counter which decrements on redemption.

Editions can provide transparency for a limited number of merch benefits attached to a collection of NFTs, by assigning an edition number to each claimable item. For example, if posters are available to the first 100 buyers in a collection of 1,000 NFTs, the number of NFTs purchased will indicate whether or not the posters are still available.

Database tracking is a method that prompts NFT holders or potential buyers to submit a form with the edition number to check the off-chain utility redemption status. The holder then enters shipping information for fulfillment if the utility is available. The final step in this method is executed off-chain and presents other technical considerations.

Proof of Attendance Protocol or “POAP” is an access utility option that allows NFT holders to claim an airdrop by providing a wallet address and to use as verification at the door for events. However, those interviewed on the topic noted fans generally don’t understand this yet, and email is still the preferred method for verification and delivery of NFT-related perks.

We hope this template continues to be useful as an educational and experimental resource for artists as they continue to forge new paths in music and Web3, especially around forms of utility that focus on longer-term access to communities and experiences that expand far beyond the NFT itself. There are still many forms of utility we have yet to incorporate into our template, including collaborative splits and royalty-bearing tokens. If you have experience or expertise in any of these areas, we would love for you to join us and help contribute to the next update of this tool, and/or reach out to us at research@waterandmusic.com with any questions or feedback.

As a reminder, we also have a GitHub repository for the contract template, which is available under an MIT license. We’d encourage you to adapt and integrate the template into your project or platform however you’d like!

Contributors

(A, B, D, F) Jonathan Larr
(B, F) Brett Kaminsky
(C, F) Alexander Flores
(D, F) Brodie Conley, Yung Spielburg, Maarten Walraven, Tom Vieira
(D) Julie Kwak
(E) Brandon Landowski, Cherie Hu
(F) Alex Webb

(A) Project lead
(B) Lawyer / contract language writer
(C) Software developer
(D) Article / education writer
(E) Article / education editor
(F) General ideation / project development