Tokenization of the music industry with music NFTs

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Prince Rogers Nelson sang “Party Like It’s 1999” because on June 1, 1999, a new computer software service would forever change how music was distributed, consumed, and even written. Napster was a peer-to-peer file-sharing service that quickly gained popularity among music fans; since its launch in May 1999, it had amassed more than 20 million users by March 2000, looking for a way to share and download music online for free. Created by Shawn Fanning and Sean Parker, the cataloging software searched your computer’s hard drive, listed all of the MP3 music files it contained, and allowed anyone using the service to share and play those files.

Napster’s popularity was short-lived, as its eventual downfall was due to legal problems stemming from cybercrime: file sharing and piracy. According to the Recording Industry Association of America (RIAA), the company’s computer software facilitated copyright infringement, and it filed a lawsuit against Napster. Napster was eventually shut down in 2001. Nevertheless, Napster’s technology had a profound impact on the music industry, paving the way for other P2P file-sharing services, which helped popularize the idea of ​​online music downloads and led to the concept of Karma, the first virtual currency for peer-to-peer systems. Karma was introduced in 2003 as a way to pay for P2P file-sharing services.

The first internet currency was co-founded—long before Bitcoin (BTC)—by Dr. Emin Gun Sirer, founder and CEO of Ava Labs, a virtual currency called Karma. Dr. Sirer explained that the emergence of the internet and subsequently the World Wide Web marked a significant shift from isolated, local computing to global-scale computing:

“Architecturally, we moved from standalone computers to a ‘client-server architecture,’ which allowed us to connect to remote services run by others to take advantage of their programs and capabilities. This new paradigm has given rise to digital services that cater to the entire world, creating millions of jobs and solidifying the United States’ position as a global economic leader.”

Dr. Sirer added: “I built a system called Karma to make sure that people who participate in peer-to-peer file sharing networks don’t just act like leeches. They don’t just take resources from the network, they also donate resources. So everybody was downloading files, nobody was putting files up for upload. So my solution to this was: What if there was a magic Internet currency that nobody controlled, that you had to use to download files? And if that currency ran out, that would stop you being a leech, and now you had to put some files up to get your Karma back.”

Ava Labs is a software company founded in 2018 and headquartered in Brooklyn, New York, whose mission is to tokenize the world’s assets on the Avalanche public blockchain and other blockchain ecosystems. This includes tokenizing the music industry with music NFTs.

Dr. Sirer explains that blockchains represent the next stage in the evolution of networked computer systems by facilitating many-to-many communication over a shared ledger. This allows multiple computers to collaborate, reach consensus, act in harmony, and create shared services on the network. This enables the development of unique, secure tokenized assets such as music NFTs, among many other innovative applications.

By leveraging the power of blockchain technology, which records the copyright of music ownership and is immutable, Avaissance’s program music NFTs opens up a new universe of creative and financial options for musicians. They’re expanding the range of music they can make by allowing them to sell music NFTs directly to fans through an NFT marketplace. Dr. Sirer notes that there are different types of tokens.

A being from the real world

A token can be a direct or indirect representation of a traditional asset. For example, many musicians are now releasing completed songs and albums as music NFTs or selling NFT concert tickets to their fans. While music NFTs present exciting opportunities for artists, they also raise copyright and intellectual property concerns. When artists tokenize their music, they need to make sure they have the right to do so. Smart contracts, a key component of music NFTs, automate the payment of royalties to creators whenever their tokenized music is resold. This feature is a game-changer in an industry where musicians often miss out on resale profits. Smart contracts simplify the process of compensating musicians, but they also raise questions about how different music royalties should be calculated and distributed fairly.

A virtual item

A token can represent a piece of digital art, such as a musician’s album cover, poster, and show photos; a collectible in the form of a musician’s signature; a game skin; videos of virtual concerts or tracks; virtual artist meet-and-greet experiences; and more. These digital assets can be turned into music NFTs that can be bought and sold for profit. They can also vary in function and form. They range from simple, non-programmable images of the musician, a common use of NFTs, to complex assets that can code every function and feature of the asset directly into the asset, some of which are used in virtual concerts.

Pay by usage

Public blockchains create shared computing resources that must be allocated efficiently. A token is a great mechanism for measuring resource consumption and prioritizing important activities. Such tokens are sometimes known as “gas tokens.” For example, BTC is the gas token for the Bitcoin blockchain, ETH is Ethereum’s, AVAX is Avalanche’s, etc. Without gas or transaction costs, a single user or small group of users can potentially overwhelm the blockchain and render it unusable, similar to a denial of service attack.

Sebastien Borget, COO and co-founder of The Sandbox, an Ethereum network-based culture and entertainment platform, has announced that he has established a new web3 arena for music entertainment called ShowCity in the metaverse, which is home to The Voice and other TV shows. ShowCity is also home to music industry heavyweights like Snoop Dog, Steve Aoki, the Chainsmokers, and Warner Music Group. It is the first major music company to enter the metaverse to host virtual concerts and other music experiences with top recording artists like Bruno Mars, Twenty-One Pilots, Ed Sheeran, Madonna, Metallica, and more.

ShowCity offers musicians exclusive digital and physical privileges, such as tickets to live recordings of The Voice, in exchange for purchasing LAND in ShowCity, which includes investing in The Sandbox (SAND), which was deemed a security by the U.S. Securities and Exchange Commission last year.

Snoop Dogg tweeted about the Sandbox Land Sale Prices: “This is a bargain.”

Musicians create avatars, digital versions of themselves, to host virtual concerts and sell millions of dollars in tickets and NFT merchandise. All products acquired on The Sandbox are 100% owned by the musicians themselves, creating revenue opportunities.

Sebastien Borget stated that ShowCity is taking a step forward towards open metaverse, sustainable fan-owned and community-focused music entertainment initiatives through partnerships with non-profit foundations that support social, environmental and climate issues.

As musicians look to tokenize their music, hold metaverse concerts, issue collectible NFTs, and collectors invest in music NFTs, they should keep in mind that the tokenization of the music industry comes with potential legal challenges and financial pitfalls. These include copyright, taxation, security classification of gas tokens, AML concerns for metaverse land sales, sanctions compliance, artist royalties, environmental footprint challenges for music NFTs and metaverse platforms, and other issues that could complicate the music NFT landscape.

Jonathan Cutler, senior managing director in Deloitte Tax LLP’s Washington National Tax practice, said:

“The final digital asset reporting regulations issued in late June include NFTs in scope for Form 1099-DA reporting. The rules include a $600 reporting threshold for sales of ‘specified’ NFTs, which are NFTs that are indivisible, unique, and do not reference certain excluded property. Once sales exceed $600, a digital asset broker can report NFT sales on a single Form 1099-DA for the year, rather than separate forms for each sale. These regulations make no comment on whether certain NFTs should be treated as collectibles for tax purposes. The April draft Form 1099-DA, which is awaiting redrafting for the final rules, also made no reference to collectibles.”