A mode of growth: NFTs, ownership, copyrights, blockchains

Earlier this year, when music NFTs entered hype-stage, one of the promises was a fairer distribution of revenues to artists. The hype came from big sales with 3LAU, Grimes, and even Kings of Leon. However, none of those NFT auctions actually included ownership. The best known example of copyright exchanging hands as part of an NFT sale was with Jacques Greene, and he actually had to sidestep the NFT to make that happen. At that point, I became skeptical of the role NFTs could play in broadening the possibilities for artists to earn revenues or broaden their income streams. Of course, as part of a smart contract attached to the NFT a certain percentage of future sales can revert back to the original creator of the NFT (which isn’t even necessarily the artist). That’s great, and I can see the benefits in that. Every time an NFT gets resold, the original creator keeps getting a kickback. Assuming the asset appreciates in value over time, that’s a good deal. And yet, that’s just one small piece of the copyright puzzle. What can NFTs, and blockchains more generally, mean to different copyrights? We enter a world controlled by collective management organizations (CMOs), and those have their own set of important problems.

Simply put NFTs offer two roads, a two-pronged fork if you will, to advance discussions about copyright and improve the way artists benefit and earn revenue from their work:

1. A world without copyright as we know it. No CMOs. Instead, everything is organized through blockchains. I’ll explain why this is a realistic possibility by drawing on the theories of economist Carlota Perez.
2. A world where NFTs and blockchains get incorporated into the existing copyright structures. For this we need metadata and the first indicators are out there that this will be developed.

Blockchain-controlled copyright

Imagine a world that has done away with traditional financial systems and which has instead replaced those with decentralized financial systems based around blockchains. This is a world where, for example, the Ethereum blockchain has fulfilled its potential, where it has become a store upon which and through which people build applications and provide access to them. The revolution of the blockchain and the associated NFT has reached both maturity and mainstream. If we look at Carlota Perez’s theory of how technological revolutions happen we’re at an interesting juncture right now. Looking at blockchain through Perez’s wave of surges [also related to the Gartner Hype Cycle], there’s the explosive growth surge, which characterizes itself by opportunity, innovation and new modes of behavior. In this surge, there’s a need for new infrastructure and for shifts in paradigms. In this phase there’s a lot of speculation which in turn drives the economic growth of the new technology. In a sense, blockchain has been through this phase, while as a smaller-scale technology NFTs are right on top of this surge.

The second phase Perez describes is the golden age. This is where the boom becomes long-lasting and where we can speak of a mode of growth. Perez characterizes this as follows:

“each technological revolution brings with it, not only a full revamping of the productive structure but eventually also a transformation of the institutions of governance, of society and even of ideologies and culture.”

Carlota Perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages (2004), p.31

Interestingly, Perez published her book on this idea shortly after the ‘dot-com bubble’ burst. This bursting bubble and the subsequent long-lasting boom of internet culture, finance, and governance is part of a trend that occurs every 50 to 60 years according to Perez. If we see ‘blockchain’ as the next, or current, mode of growth, this cycle is quickening. And to understand the realistic nature of a near future regulated through blockchains we do need to see this revolution as a mode of growth. When it comes to copyright, though, we are at the very early stages of creating new infrastructure. In the intro I mentioned the Jacques Greene NFT which included the publishing rights to the underlying song. While Greene organized this transaction outside of the NFT, Bluebox is looking to incorporate various aspects of copyright into the NFT smart contract. The idea behind Bluebox is to create 100 NFTs per song, each representing 1% of the underlying copyrights. The artist can then decide how many of these NFTs and thus how much of their intellectual property they want to sell. In the same breadth, any fan, or investor, can decide to become owner of one to several percent of a song. Bluebox is built on the R3 Corda network and currently is a kind of walled garden. In other words, it has the ability to both sell the copyright and organize the flow of royalties, as per Lee Parsons, CEO of Ditto and co-founder of Bluebox, in MBW last month.

As the Corda network opens up to more public blockchains, such as Ethereum, it will be interesting to see if, and how, there can be a mix of NFTs from one blockchain-based marketplace to the next. It’s important, however, that there’s an example of what it means for copyrights to be organized through a decentralized database. It’s one step towards a better infrastructure, more inclusive governance and a more artist-driven royalty structure.

The need for Metadata

I get that a fully-fledged decentralized system for copyrights might seem far away, even if we see the current NFT hype as a small part of the boom of blockchain. So what would it mean for NFTs to be incorporated into current structures and systems? Most importantly, this would require metadata. And this recent announcement from OpenSea made me hopeful that this isn’t actually too far away from happening.

First and foremost, this new set of metadata allows NFT creators to make much more dynamic digital assets. However, the addition of more metadata fields within the code of the NFT also opens up a route for tokens to be matched with broader copyrights and licensing organizations. I recently wrote about how certain independent management entities (IMEs) are working with blockchains to prevent unallocated royalties. If we take this use of blockchains one step further we can envision a shared database of contracts that will allow songs to be tracked throughout its various usages: in-store, through DSPs, sync, remix, etc., etc. Somewhere there needs to be a piece of metadata that is shareable and verifiable each time a song is used.

Some IP lawyers have argued that to allow security in this chain of sharing and verification only the original copyright owner – they of the intellectual property (IP) – should be allowed to mint an NFT. So far, however, NFTs are closer to other collectibles and, for example, photos. Both of those allow someone who doesn’t own the IP to create a variation of it, like a card or a print, and earn revenues from this. This is one reason why music-related NFTs haven’t yet included transfers of copyright ownership. Music is already made available as a digital copy and has a set of complicated rights attached to it to make sure that rights owners get paid when one of those digital copies is used.

Which brings me back to the issue of the metadata. Tracking a digital copy is difficult, especially if not all elements where its used work on the blockchain. This is why Bluebox works so far, because it operates as a walled garden where it can control and track and verify. A next step could be to move music-related NFTs into a license such as the one attached to Cryptokitties. Dapper Labs introduced the NFT license which allows owners of to “commercialize your own merchandise, provided that you aren’t earning more than $100,000 in revenue each year from doing so.” While this sounds good, much of it rests on using other marketplaces that can “cryptographically verify that you are the owner.” And while this Dapper Labs NFT License allows some form of monetization through merchandise, when we look at YellowHeart’s, the marketplace known for the Kings of Leon and XXXtentacion NFT sales, terms of service simply do not allow for commercial use outside of reselling the NFT through a marketplace that allows for cryptographical verification.

If, then, the fully decentralized system for copyrights rests on the broader adoption of blockchains into the world of financial transactions, or even see it supplant those centralized world, it might be easier to find ways to track copyrights through metadata attached to smart contracts related to NFTs. If we look at Perez’s lifecycle of a technological revolution again, we can imagine further integration into the existing infrastructure for copyright management in the second phase.

Supplanting the current ecosystem of copyright management will not follow until the blockchain revolution is towards the end of phase three. At that point, the full spectrum of the market will have adopted the technology and that will allow tracking of IP and allocation of royalties wherever that IP is used. There is no walled garden, instead there is full interoperability. For now, though, we need to be happy that we can look at integrating metadata into any future NFT sale that will allow it to be tracked within the current system, which is organized by CMOs and challenged by IMEs. The latter will prove essential in the adoption and integration of the metadata. They will also help push innovations in the infrastructure necessary to help rights owners follow usage and chase revenues.

Some time after

By looking at blockchains as a technological revolution in the sense of economist Carlota Perez I was able to position NFTs as still an early new product as part of phase one. In itself, NFTs are seeing their own little boom-bust-plateau cycle. In the broader scheme of the revolution NFTs will allow – some time after – to first see an integration with existing copyright structures and then a completely new system: a world without copyright. The former will help artists and rights holders to better track and monetize their assets through the inclusion of metadata that is accepted and verifiable by an increasingly broader set of organizations. The latter currently seems like a blue-sky-idea but actually runs parallel to the future as a decentralized database where copyright might not exist anymore and instead a different type of royalty structure has emerged. This structure should be more artist-driven as it puts more power into the hands of the original owner of the IP owing to the fact that they can always maintain control of how much of their IP they sell off in the first place. Whole new markets will evolve from this, but looking at Perez’s cycle this is still a couple of decades away. In the meantime, it’s important to question the ownership structures related to NFTs as this goes through its own hype phase.