An overabundance of music NFT platforms — and scams

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The hype around music NFTs has not slowed down; for better or for worse, it’s just taking a different form.

As Water & Music reported previously, the music NFT market reached its peak just over six months ago — generating nearly $27 million in primary sales in a month, thanks largely to blockbuster campaigns from the likes of 3LAU, RAC, Steve Aoki and Diplo. Since then, primary sales have plummeted by over 95% to just around $1.5 million a month on average, with almost no celebrity drops in sight.

Increasingly, though, energy and hype seems to be coalescing at the platform level, rather than the drop level. This leads us to our data point for this week:

There are over 50 different music NFT platforms on the market right now — nearly all of which launched in 2021, and more than 20 of which launched in the last two months alone.

– Water & Music’s original research

From my experience, in terms of new players entering the market, this new wave of hype around music NFT platforms is the fastest acceleration in new venture announcements, partnerships and fundraises that I’ve seen anywhere in music/tech — even faster than livestreaming at the start of the pandemic.

We’ve listed all 50+ of the music NFT platforms on our radar in a dedicated tab in our members-only music/crypto database. If you look through the list, there’s some variety in what kinds of experiences each platform is working on, ranging from crowdsourced curation (Derive) to generative art (Async) and fractional music royalty investments (Opulous).

But the vast majority of platforms on the list are operating within a relatively limited framework of scarce “digital collectibles” around a song or visual artwork (examples: RCRDSHP, KLKTN, OneOf, Throne, AmplifyX… the list goes on). Many of these platforms even explicitly use the term “collectors” instead of “fans” — fully buying into the notion that the exclusive collector culture popularized by NFT marketplaces like NBA Top Shot and Nifty Gateway can also apply to music fandom.

Today, I want to contextualize this growth data through the lens of how these dozens of music NFT platforms are trying to stand out in a land of overabundance — and how some of their short-term differentiation tactics are potentially putting fans at serious financial risk.

Unsurprisingly, a lot of music NFT drops that leaned on celebrities for exposure are starting to be understood as scammy ripoffs to fans who don’t know any better. For instance, rapper Lil Uzi Vert had tweeted last week in support of NFT avatar collection project Eternal Beings (similar to CryptoPunks or Bored Ape Yacht Club), even suggesting outright that the floor price for the NFTs would be “6+ SOL minimum … easy.” But then the rapper quickly deleted his original tweets once the NFTs sold out, causing all the NFTs in the collection to dip far below their original mint price on the secondary market.

More recently, it was also revealed that Tory Lanez’s NFT drop with E-NFT (a subsidiary of Emmersive Entertainment) — which the rapper had self-reported as selling a million copies in under a minute — also had several characteristics that sniffed of a potential scam, or at least as an unfriendly environment for fans. Never mind the crucial fact that Tory has been charged with felony assault, which you’d think would prevent any forward-thinking brand from partnering with him. As Jeff Ihaza covered for Rolling Stone, E-NFT also took a 15% platform fee on secondary transactions, a much higher cut than the market standard (which tends to be closer to 5%, if there is any fee at all). Some fans have yet to receive proceeds from secondary sales of their NFTs after waiting more than 30 days, and have not been able to transfer their NFTs from Emmersive’s on-platform custodial wallets to their own wallets elsewhere.

These kinds of “rug pulls,” as they’re called in crypto land, will sound familiar to anyone who lived through the ICO boom of 2017 and 2018, where an estimated 80% of offerings turned out to be scams. In terms of music NFT platforms imploding due to misaligned incentives among consumers, platforms, partners and investors, I think this is unfortunately only the tip of the iceberg, especially as more and more of these platforms raise traditional venture-capital funding.

Which begs the questions: In this landscape of unprecedented competition, prolonged media hype and move-fast-and-break-things product development, how do we separate the signal from the noise? And what lessons can future music/crypto pioneers learn from the missteps that have taken place so far this year?

A fundamental conflict of incentives

Because the NFT economy runs largely on reputation, clout and status, many music NFT platforms have inked strategic investment and partnership deals with high-profile music celebrities and executives in an attempt to up their PR game. Key examples on our radar include Harvey Mason Jr. (Ureeqa), Michael Rapino (Autograph), Andrew Gertler (Sturdy Exchange), Gee Roberson (Throne) and Ja Rule (Flipkick). This tactic is certainly not new in the world of music/tech, where startups will often rely on celebrities’ established audiences or executives’ entrenched networks for early user acquisition.

But the problem with this approach in crypto specifically is that many celebrities seem to be treating music NFTs as an influencer marketing opportunity, not as a tech innovation opportunity.

More often than not, celebrities just want to make their quick buck for supporting a desperate startup and increase the wealth of themselves and their own brands, rather than invest long-term in a new community and technology that may very well destabilize their careers by reinventing our whole understanding of fame, celebrity and success in the process. This short-termism then negatively impacts how the tech platforms themselves build their product and prioritize growth, leading to a lower-quality experience and higher churn rates for the end users.

We’ve seen many other startups in music/media make a similar mistake, which I described last year as conflating celebrity appeal in and of itself with a good user experience. Quibi, Luminary and Tidal are just three of the best-known examples of Web2 media/tech companies that paid top dollar for exclusive content from big-name celebrities — at the expense of making their core product something that users would actually stick with over time, regardless of their allegiance to any one star. To me, this approach is an underhanded way of saying, “Our product isn’t actually that good, so we’re trying to cover our asses with as much artificial hype as possible instead of letting the quality of the technology speak for itself.”

The fiasco with Uzi and Eternal Beings is a perfect example of this conflict of incentives in practice. When disgruntled EB NFT holders asked the project’s staff for an explanation, they posted the following statement in the announcement channel of their Discord server (hyperlinks added):

“It is not that [Uzi] doesnt [sic] want to or has no feelings about the project. He is currently working on his album and wants to remain private. As you can see he deleted all pictures on socials and uploaded one sole picture of his featured song. He is 1000% aware of EB and will speak soon.”

To me, though, this explanation only digs deeper into some fundamental problems with the nature of this partnership. For one, to tell your community that your biggest celebrity endorser is merely “aware” of your project is not reassuring. And even though Uzi had a clear financial incentive in supporting the EB project long-term (according to a staff statement, he “made a certain % [of NFT sales] we are not allowed to disclose”), he still decided not to prioritize the startup in his own marketing because, duh, he has a whole frickin’ album on his mind.

With respect to trust, the short-term thinking of celebrity influencer deals puts crypto projects like Eternal Beings in a tough spot. Especially considering how many people have been scammed in the recent past with the ICO boom, traction in crypto is arguably one and the same with trust that a project is in it for the long term. If fans and crypto heads are buying into a token, more likely than not they’re interested in buying into a wider community and a wider mission that will outlive any one single campaign. So if they see one of the main figureheads of the token seemingly back out at the last minute — even if the intentions are different — that trust is immediately eroded.

In contrast, a lot of the most exciting creative projects in music and crypto, like Songcamp, are not leaning at all on celebrity hype. Rather, they are building more grassroots communities from the ground up — similar to the spirit of early Web2 music forums — with artists who genuinely see crypto as a long-term tech innovation opportunity rather than a flash in the marketing pan. As film producer Keith Calder once argued in a (now-deleted) tweet: “It’s ALWAYS better to be the top priority project for upcoming talent than the lowest priority project for big established talent.”

Transparency alone won’t eliminate bad actors — but it makes them easier to catch

Another core conflict of interest that I’m seeing as celebrities cash in on music NFT platform overabundance is the tension between the on-chain nature of Web3 and the labyrinth of non-disclosure agreements (NDAs) in traditional entertainment deals.

The crypto/Web3 community as a whole has certain expectations about basic levels of data transparency and interoperability around music and art NFTs. For instance, many creative communities see crypto as an opportunity to improve cultural equity — so we should be able to have easy access to clear revenue split information for each NFT, so that we know that the right contributors have a stake in the token’s upside. Because crypto is all about decentralized protocols, we should also be able to transfer NFTs easily and immediately from one wallet to another, with a clear record of historical ownership and provenance. Without this public record, as Bas Grasmayer put it in a recent blog post, “there’s no guarantee that the NFT will live beyond the lifespan of the platform in case of bankruptcy or an actual scam.”

The key ideas here are longevity, transparency and mobility, which give us a good framework for understanding why a lot of celebrity-driven NFT drops are coming across as scammy or illegitimate. Namely, celebrity endorsements tend to be short-term, are the complete opposite of transparent in terms of payouts and tend to be more exclusive and centralized in their management. Lanez’ album NFT drop drew so much criticism from fans because the flow of money was not transparent (a 30-day processing period for an NFT sale is an immediate red flag) and the overall user experience was not designed for mobility (in that fans struggled to transfer their NFTs to their own wallets). Uzi’s partnership with Eternal Beings drew criticism because his incentives for being involved were not clearly laid out on-chain, in terms of his own revenue split or cash reward being clear, and fans are now paying the price.

As Mat Dryhurst, one of the top artists and thinkers in Web3, said during a panel we were on earlier this year, one of the bargains you enter into as a participant in crypto and decentralized protocols is that “there’s no central actor to impede somebody else from doing something you don’t like.” As long as there is the potential to make significant financial gains off of crypto, bad actors — famous or otherwise — will come in to take advantage of the system.

The upside of decentralization, though, is that it becomes much easier to weed out these bad actors and to keep public figures and organizations accountable for their actions and promises to their communities (as the controversy around Nate Chastain’s insider trading on OpenSea suggests, for example). Unfortunately, in partnering with celebrities through old-school contracts and NDAs, what many music NFT projects seem to be doing is taking that opportunity for accountability away.

So, where do we go from here? Amidst an overabundance of music NFT platforms, a commitment to building for this trifecta of longevity, transparency and mobility will already be a significant competitive advantage. I think music-industry professionals should also keep an eye out for which platforms genuinely have a clear, long-term vision for the role that NFTs can play in music culture and fandom, beyond just collectibles that can sit idly in someone’s wallet, can be flipped for profit and/or lose 60% to 80% of their value with the deletion of a single tweet. And any investments from these platforms in marketing or growth-hacking innovations should complement, not cancel out, the quality of the technology itself.

At the very least, these steps will help protect not only artists, but also music fans, whose trust and understanding the crypto world urgently needs in order to bring its groundbreaking ideas for the music industry mainstream.