This is How a Rapper can use an NFT (non-fungible token)
Everyone from Post Malone to Mark Cuban is talking about NFTs. When rappers, NBA-team owners, and billionaires talk about a niche in the DeFi space, you should pay attention. In this post, we break down what NFTs are, how they work, and what rules they follow. But in order to understand it, we’ll have to play a game.
Can a small-time rapper make it big?
Imagine you’re a struggling rapper. You don’t have a lot of money to produce your tracks and no record label wants to sign you yet. What you do have however is an audience that digs your rhymes. They might not be as big as a big-shot record label, but they’re a loyal following. They come to your shows, cheer you on, and buy your mixtapes. Can you leverage your audience to advance your career? And can your audience leverage your talent?
This is where an NFT or a non-fungible token comes in. Through the NFT, you the rapper can tokenize yourself. Here, “yourself” does not directly mean that people can buy or sell you for tokens. You, the rapper can either tokenize fan engagement or tokenize your songs. There are a number of things that can potentially be tokenized but these are the two that have been implemented.
For instance, rapper Lil Yachty sold his $YACHTY tokens for a quarter of a million dollars. The token gives fans exclusive access to the rapper, and engagement in online parties.
Through an NFT, you can also tokenize the ownership to your tunes. You’ll still own the track because you wrote, rapped and recorded it, but so will other people. The ownership is divided between two sets of people – you the creator of the asset and investors, the people who are funding you.
Your asset is your art
In order to own a part of your asset, i.e. your music, investors pay a certain amount. This amount is paid in a cryptocurrency like ETH. For instance, CryptoKitties, an NFT that sells virtual cats has priced its most expensive asset – Dragon at 600 ETH. That’s nearly $1 million, for a virtual cat!
You see how the owner can tokenize the asset and split ownership to other people? That’s what you can do with your tracks
Through the NFT, you can tokenize either engagement or the ownership to your tunes.
Before getting into the weeds of the rules of tokenization understand the two end goals of NFTs:
- You receive money to advance your music career
- Your audience gets an asset – either engagement with you, or a part-ownership to your tracks
Why buy an NFT?
But why would the audience want to buy an NFT in the first place? That’s a good question.
If the rapper is already successful and has a fan following, then loyal fans would pay anything to get engagement. This is why a lot of established rappers like Yachty, Post Malone, and even Linkin Park’s Mike Shinoda are launching NFTs.
But you, on the other hand, are an up-and-coming rapper. You might not have the groupies to get the engagement, but you do have potential assets. The audience may want a piece of your music’s success in the coming years. The rapper writes, raps, and records the tracks and puts this into an NFT. You the audience member can buy this NFT and stake your claim to the rapper’s success. Of course, this means that you’ll have access to any potential royalties that arise from the songs. If the track is a hit and is nominated for the Grammy’s, you’ll make a killing for spotting the rapper at an early stage. However, if it bombs, then your ears were fooling you.
This allows the rapper to generate funds early on to pay for their production, marketing, or buy those snapbacks.
NFT – nothing like before
So, are these tokens – assets? Yes, these tokens are assets. Like any other asset, they signify investment. But the cool thing about NFTs (and this is where they differ from equity investments like stocks big time) is they are unique. This means that no two non-fungible tokens are the same. The word ‘fungible’ represents an asset that can be replicated, interchanged, or switched. A wrinkled $10 note in your pocket will fetch the same cup of coffee as the fresh from the bank $10 note in my pocket. This isn’t the case with NFTs.
Every NFT is unique. Since the craving for an NFT is on a personal level, each token is different from the other. It contains the details of the holder, their name, wallet address, the cryptocurrency used to purchase it, and more. All of this is encoded through blockchain technology. This is also how NFTs are kept from being duplicated. Think of an NFT as a personal piece of memorabilia from the rapper. It’s valuable to you in a way that it can’t possibly be to someone else. Similarly, the value of the NFT is in the eye of the beholder, even if it’s a cat on the internet.
What makes an NFT, and NFT
Every game needs rules. Even a rapper launching an NFT. These rules need to be enforced. The rules for NFTs are based on ownership and this is encoded in the blockchain. This can be a private blockchain or a public blockchain like the Ethereum blockchain.
A blockchain or a distributed ledger is a storehouse of information in a decentralized manner. Think of the NFT’s blockchain as a database for all the information we require.
The blockchain enforced certain important rules that the creator of the token, in our case the rapper, has put in. Whatever the nuances of the rules may be, in order for an NFT to be an NFT, they need to follow these principles.
An NFT should have a limited supply. There should be a fixed number of tokens that can ever be produced. This ensures that the value of the tokens cannot be changed by increasing its supply (mining tokens) or decreasing its supply (burning tokens). This gives the holders of the tokens safety against price change.
NFTs have a fixed number of coins that can ever be produced. However, this production can be based on a schedule and does not have to all be produced at once. This will prevent hoarding of the token. Since NFTs are circulated on the blockchain, any token produced outside the blockchain will have no real-world value. This prevents duplication and the creation of fake tokens.
If an asset is limited, that means it’s scarce. Scarcity also comes from the ability to be unique. Since each token is unique from the other, it is limited to one, and it checks the scarcity box.
Now that we’ve established an NFTs scarcity, it should be verifiable. This means that the public should know how many tokens are produced out of its total supply. This will ensure that the market prices its tokens correctly based on the pace with which the token is becoming scarce. Or if the individual is pricing it based on their affinity to the artist, they should know the scarcity of the asset. If there are millions of NFTs that give fans engagement with an artist, it’ll be worth less than if there are just a hundred.
Not only should the number of tokens be verifiable but the holders as well. This means that it should be possible to find out who owns how many of the NFTs. This, again, can be done via blockchain technology. Since every transaction is recorded on the blockchain, each NFTs ownership can be verified and put in the context of how many tokens are created by the artist. This means that nobody can dispute that you own a piece of the artist’s assets.
One key difference between NFTs and simple digital assets (apart from the non-fungible nature that we’ve laid out) is that these tokens have a specific use. Its use is what the content creator decides. The rapper can decide that the holders will get royalty payments from future income. The digital artist, will give exclusive pieces of art to holders. The athlete will host post-match after parties with holders. Each of these use-cases are different but the creator determines their purpose.
The reason this purpose is unique is that the creator has to give holders a reason to buy that token. It can’t be used for anything and everything. This purpose is to provide value to the holder, either in the form of holding a virtual cat, a piece of digital art, or the opportunity to attend a party with an artist.
While a flourishing secondary market for NFTs is still in the works, this underlines the potential of what these digital assets can truly become. Every NFT should (eventually) build a secondary market. But first, we should differentiate between a primary and a secondary market. In investment terms, the primary market is when the issuer (company or in the NFT’s case – the rapper) gives out the token to investors. The secondary market is when investors sell the tokens to other investors. This is done via an exchange.
Similarly, NFTs also have secondary markets. This allows for a process called – price discovery. This is when the market (or the rapper’s audience) prices the talent, and hence future earnings potential of the rapper. This is similar to pricing the future earnings of the company, called valuation. But in a secondary market, several things can impact the price of the token.
Say the rapper signed a multi-million dollar deal with a record label. This is big news. This means that he’s set to make it big, and his future earnings are close to realization. In a secondary market, investors would scramble to buy his token because they expect its price to shoot up in the future. Hence, the price of the NFT rises. Similarly, if he ends up getting dropped by the record label, the future earnings potential declines and the NFT’s price will fall. Everything the rapper does is linked to the market and priced-in.
Another key benefit of secondary markets is liquidity. This is the process of selling something quickly for cash. An NFT on a secondary market can be easily bought or sold for cash. Investors falling out of love with the rapper’s music can sell the token to those only recently vibing to his tunes.
NFTs – value like no other
An NFT for rappers works the same way as an NFT for an artist, a writer, an athlete, or anything else. The power of the token is ownership. Since there’s only one token of its kind, whether it’s a highlights reel from NBA Topshot, a Grimes’ masterpiece, or a Grammy-winning rap song, it’s all captured in the token. This value proposition is put into a token and encoded, sold, and verified by blockchain technology.
It’s no wonder that NFTs worth $100 million were sold in the month of February 2021 alone. By the looks of it, this is just the beginning.
If you want to know more about NFTs, watch our videos: