NFTs (non-fungible tokens) are a novel form of ownership that could rejigger the financial landscape for creators. Even if the market for some of them proves frothy, this blockchain-based technology presents a unique way for artists to make money and engage their fans. With experimentation already underway, the gates are open for them to do what they do best: get creative.

The Opportunity

Several startup founders and musicians are looking to this incipient market not just as a means of selling digital collectibles, but as a unique way to offer fans exclusive, paid experiences.

"Any new avenue of potential profit is exciting in the music industry, considering the lack thereof from streaming and [the need to rely on] touring," said Brian Spencer, one half of the L.A.-based musical duo FINKEL.

There's nothing new about creators offering fans exclusive perks. What is new is that they can now be linked to an NFT that also functions as a "key" or "passport." Many artists are hoping this linkage can stoke demand for perks, thanks to the innate human attraction to ownership.

"There's a lot of psychological evidence that owning things matters a lot to people," said Valentin Haddad, a professor at UCLA Anderson School of Management who studies how and why people make financial decisions.

He pointed to the so-called "endowment effect," which, research has suggested, makes people value things more when they own them, simply because they own them. Since NFTs are a certificate of ownership, linking them to an experience – like a backstage pass, or a producer credit – should boost the value fans see in those experiences, Haddad said.

"I think the idea of tying some experiences, tying something more special, to the object [underlying the NFT] is going to increase," he said. "We're going to see lots of creativity."

Illmind is auctioning 10 NFTs linked to audio files he created that owners can use royalty free.

Rapper Post Malone is planning to sell an NFT linked to a private game of beer pong. Illmind, a Grammy-winning DJ, is auctioning 10 NFTs linked to audio files he created that owners can use royalty free. Electronic musician Aphex Twin recently turned an NFT into a digital scavenger hunt. And Logan Paul, a YouTuber, linked an NFT to the opportunity to watch him unbox rare Pokémon cards.

Other creators are taking a less experiential and more charitable approach to offering NFT products. Street-artist Shepard Fairey, best known for designing the Obama "Hope" poster, is working with East Hollywood-based Verisart to auction off a digital artwork as an NFT, and donating the proceeds to Amnesty International. Pussy Riot, a Russian feminist punk rock group led by activist Nadya Tolokonnikova, recently minted four NFTs tied to a video produced by young AR pioneer Asad Malik of La Cañada-based Jadu, some of the proceeds of which went to a shelter for domestic abuse survivors.

Meanwhile as the metaverse inches closer, the range of perks and experiences that can be tied to NFTs is growing. One sign of things to come is Decentraland, a virtual world with its own blockchain-enabled currency that has hosted digital parties that require NFT-ownership for entry.

Financial Stake

The same technology that enables these unlockable perks, whether digital or in-person, also allows artists to retain a financial stake in all future sales of the NFTs they issue. Stipulations like sending 10% of the price paid for an NFT to a specified bank account can be executed automatically: thus the term "smart contract."

Smart contracts are one element that distinguishes the Ethereum blockchain, on which most NFTs run, from the blockchain that underpins Bitcoin and many other cryptocurrencies.

They're also what could make NFTs helpful to smaller artists in particular. Since smart contracts can theoretically automate tasks like preventing fraud and scalping, they open up new opportunities.

"It's giving artists lots of access to ways to share experiences and share things that big artists could always do [but] small artists couldn't," Haddad said. "The benefits are likely to accrue to the top, but I think it will benefit everybody by creating a better way to exchange with your fans."

Artists' NFT Concerns

One downside to NFTs is the high volume of electricity they use, which can harm the environment. That's turning some artists away from them for now.

FINKEL is unlikely to pursue NFTs until the environmental concerns can be addressed, Spencer said.

One way of doing so could be a shift in how the blockchain works. Validating who owns what on a blockchain has largely relied so far on a method called "proof-of-work," which requires intensive computation that uses an immense amount of electricity. Some observers say an alternative method, called "proof-of-stake", would require less and could be less environmentally harmful. Although proof-of-stake has not been widely adopted, Ethereum has publicly stated it wants to transition to it, in part because of its environmental benefits.

Beyond environmental concerns, some artists bridle at NFT perks because of their inherent exclusivity and transactional nature.

Rebecca Arango, aka Oddnesse, thinks the tactic could perpetuate what she views as a deeper problem underlying the tenuous financial situation that many musicians find themselves in: fans have lost the human connection they once had with the artists behind the music they love.

"It's like the music just comes and goes and it'll always be there, and if one artist goes broke and gives up, there's always another one where that came from," she said.

But she concedes she may be fighting an uphill battle.

"I'm still going to advocate for the [intrinsic] value of the songwriting and the records," said Arango. "[But] if people are really into owning these digital tokens, I'll have to get with the program."