Web3 Music: Experimental Innovation of the Traditional Music Industry Chain

Author: Zixi, 0xRank

1. Overview of the Traditional Music Market

1. The traditional music market is experiencing both decline and rebirth The entire music market over the past 20 years can be described as experiencing decline and rebirth.

Physical music represented by records, CDs, and albums has been continuously weakening, with the market size in 2020 around $4.2 billion, an 81% decrease compared to 2001. However, after 2010, with the continuous development of Web 2, internet music represented by streaming media has developed rapidly, with the streaming music market size reaching $13.4 billion in 2020, a 3250% increase compared to 2010.

Although the overall music market size in 2020 is still not as large as it was in 2001, we notice that internet music represented by Web 2 streaming is continuously revitalizing the entire music market. With the maturity of Web 3 infrastructure, the growth of musicians and users, and the existing problems in the traditional music industry chain, we believe that Web 3 music may represent another innovation in the music market. Global Music Market Size

Source: "International Music Market Report: 2021" 2. The number of global musicians is around ten million, but income is unsatisfactory From the creator's perspective, the number of musicians globally should be around ten million.

From a global market perspective, according to Spotify CEO Daniel Ek, by the end of 2020, there were about 8 million musicians on Spotify, and the number of musicians on the platform is expected to reach 50 million by 2025. In the Chinese market, QQ Music and NetEase Cloud Music both have over 300,000 musicians. Considering data duplication, the global number of musicians is around ten million.

The growth of musicians is due to the significant reduction in the barriers to release and production. However, in terms of income, the vast majority of musicians find their earnings unsatisfactory. The music industry is severely fragmented. According to the income data of musicians in China in 2020, 75% of musicians had a monthly income of less than 8,000 yuan. Additionally, most long-tail musicians' music income is merely a side income. Comparison of Musicians' Monthly Income in 2019 and 2020 Comparison of Musicians' Music Income as a Percentage of Total Income Minimum Clicks Required for Artists to Earn Minimum Income Source: "China Music Market Report: 2020", Euterpe White Paper 3. The number of global paid music streaming users has exceeded 440 million From the user's perspective, by the end of 2020, the number of global paid music streaming users reached 443 million. In the past decade, international paid streaming users have shown rapid growth. Domestically, QQ Music alone had 71.2 million paid users by Q3 2021, with a payment rate of 11.2%. Additionally, music users also include record consumers, concert-goers, and consumers of music-related merchandise, indicating that the overall potential number of music consumers and penetration rate is expected to maintain rapid growth. 2010-2020 Global Paid Streaming User Growth 2019-2021 QQ Music New Music Paid Users 4. The complexity of the traditional music industry chain is a core factor leading to low royalties for musicians The overly complex industry chain of the traditional music sector is a core factor leading to the currently low royalty income for musicians. The upstream of the entire music industry chain mainly consists of music producers represented by lyricists, composers, and singers, such as Jay Chou and Vincent Fang. The midstream mainly consists of record distribution companies, represented by the four major record labels: Sony, Universal, EMI, and Warner. The downstream consists of various consumers and agents, such as QQ Music, NetEase Cloud, and listening users.

In the current royalty distribution based on internet streaming music, the income that musicians can obtain is quite limited. The common practice on streaming platforms is that 42% of a song's royalties go to record companies (like Sony, Universal, etc.), about 30% goes to operating systems (like Android, iOS, etc.), and about 20% goes to internet streaming platforms (like QQ Music, NetEase Cloud), while lyricists and composers together receive only 8%, and singers mostly settle with record companies. If the lyrics and music are represented by multiple agents, the royalties will be divided further, resulting in even less reaching the authors. Traditional Music Distribution Industry Chain 5. Traditional musicians receive limited copyright distribution, along with delayed income and lack of transparency In addition to limited copyright distribution, musicians also face issues such as delayed income and lack of transparency in copyright matters. Record companies and publishers typically publish information related to copyright usage fees quarterly, but the actual income reaching musicians often takes one to two years.

Currently, users can download related music on streaming platforms with just a click, while countless intermediaries take one to two years to distribute the royalties to copyright holders.

This is partly due to the complex legal landscape of the copyright industry, and also because of the numerous intermediaries involved. Furthermore, according to the Rethink Music report, 20%-50% of copyright income does not reach the legitimate copyright holders but is consumed in various opaque processes.

Music copyright involves multiple parties

Source: RETHINK MUSIC, FAIR MUSIC: TRANSPARENCY AND PAYMENT FLOWS IN THE MUSIC INDUSTRY 26 (2015).

2. What Problems Does Web3 Music Solve?

1. The essence of Web3 music lies in reshaping the industry chain The essence of Web 3 music lies in reshaping the industry chain. Compared to the extremely complex industry chain of traditional music described above, Web3 music projects reshape and simplify the industry chain: musicians can directly mint music into NFTs through creative projects or MusicFi/NFT marketplaces and deliver them to downstream consumers.

The benefits brought by reshaping the industry chain mainly include:

1. Reducing complex intermediary costs. As described above, musicians can only receive about 8% of copyright income on streaming platforms, while the remaining 92% is exploited by record companies, operating systems, and streaming platforms. Simplifying the industry chain allows musicians to directly benefit from higher income, supporting a better quality of life.

2. Making royalty income more transparent and timely. As mentioned earlier, in the traditional music market, copyright fees can take one to two years to be received, and the distribution process is extremely opaque, with most long-tail musicians having low bargaining power and silently enduring such phenomena. By minting music on-chain as NFTs, the royalties generated from plays can be transparently and immediately reflected back to musicians. However, how to accurately and fairly transfer the off-chain income of music works onto the chain remains a problem to be solved.

3. Fans can share in the growth benefits of musicians. Fans who support musicians can purchase NFTs early on, allowing them to enjoy both royalty income and the appreciation of the NFTs. The potential benefits of both encourage Web 3 users (especially NFT enthusiasts) to continuously purchase musicians' NFT products.

4. Fundraising becomes more convenient. Taking the U.S. market as an example, the traditional marketing costs for artists/musicians range from $500,000 to $2 million. This is a high cost for small and independent musicians, but through the issuance of NFTs in the primary market, artists can easily raise hundreds of thousands of ETH through white papers, community operations, and personal influence to fund their projects, subsequently increasing the value of their works to benefit the community. Investment Required for New Artists in the U.S. Market 2. Web3 music cannot solve the low income problem of long-tail musicians Although it has been mentioned that Web 3 music can reshape the industry chain, it cannot solve the low income problem faced by most musicians. From the supply side, since the 21st century, the cost of releasing music has been decreasing, leading to a surge of online musicians and intensifying market competition. From the demand side, users' entertainment time is limited, and they now have to compete with applications like TikTok and Bilibili for user attention.

Moreover, the number of Web 3 users is relatively small, and considering the differences in language and style across different countries, the number of people willing to listen to music on Web 3 platforms is quite limited. Therefore, for most long-tail musicians, their published music works may very well become "zombie works," resulting in low income being a reality. Web 3 music merely reshapes the industry chain, making it more transparent and efficient, assisting musicians in becoming wealthier rather than exploiting them. Most Web3 Music Has Very Low Play Counts 3. Sub-sectors mainly include streaming playback, trading, royalties, and creation Currently, the main sub-sectors in the entire Web 3 music sector include streaming playback platforms, NFT trading platforms, royalty platforms, and creation platforms. Each of these four sub-sectors has significant potential.

Creation platforms are upstream in the sector, supporting users in creating initial music NFTs and facilitating secondary and multiple creations of initial works. Users can easily create new memes based on JPGs, but music itself is difficult to recreate, and the difficulty of secondary creation is high. The emergence of music creation platforms greatly facilitates users in secondary creation, thereby promoting the dissemination of community culture and enhancing the liquidity of music NFTs.

NFT trading platforms are upstream/midstream in the sector, primarily serving as platforms for musicians to issue NFTs to fans in the primary market and for fans to trade NFTs in the secondary market.

Streaming playback platforms are downstream in the sector, similar to QQ Music and NetEase Cloud Music, serving as Web 3 music playback platforms and one of the core platforms for musicians to expand their community influence, with development logic similar to Web 2 streaming playback platforms.

Royalty platforms, based on achieving NFT royalties, usually also incorporate DeFi functions. Web 3's music royalty platforms serve musicians and fans, aiming to solve issues of opacity and delays in royalty distribution. Current Sub-sector Division of Web3 Music

3. Project Mapping

1. Overview of Star Projects in the Sector

2. Audius: Currently the Largest Web3 Streaming Music Platform Audius is currently the largest Web 3 streaming music platform. Audius adopts a registration method combining Web 2 email and Web 3 wallet login, making it user-friendly for traditional internet users and avoiding the high barrier of wallet login. As a music platform, the presence of top music stars brings significant traffic to the platform, and Audius is striving to attract musicians through token rewards.

In its early days, the platform recruited some musicians as advisors or creators and distributed a large number of airdrops. In the October 2020 airdrop, each person received an average of 5 million tokens (currently worth $3.5 million) to incentivize creators to produce works and give back to the platform.

Additionally, Audius has launched incentive programs to attract long-tail musicians, such as awarding 100 tokens to creators of the top five most popular songs each week, and creators of the most popular playlists can also receive 100 tokens.

Currently, the vast majority of Audius users are likely Web 2 users rather than crypto users. From the current token holding addresses, the number of recent holding addresses has reached around 24K, while the current active user count is about 100K, indicating that most users (over 75%) are not token holders but rather Web 2 natives or users interested in crypto/music.

Similarly, the community atmosphere reflects this, with a channel in Discord open only to token holders, while discussions about token prices are prohibited in other channels, which mostly focus on music creation itself.

Unique Token Holding Addresses

Audius Daily Active Users

3. Audius: Token Empowerment is Adequate, Economic Model Needs Improvement Overall, token empowerment is adequate, and the main functions of the token include:

Staking to participate in node operations. Audius's music files are stored on IPFS, with nodes divided into content nodes, which mainly store user data, images, and audio files, and search nodes, which are responsible for searching playlists and users. To become a content node, one needs to stake between 200,000 to 10 million tokens, while becoming a search node requires staking between 200,000 to 700,000 tokens, making the overall cost relatively high (retail investors can choose to delegate staking).

Community Governance

Mining

Participating in platform economics. However, the overall economic model of the platform is relatively weak; tokens are primarily used as rewards, and the reward amounts are not substantial. Additionally, since the platform currently lacks a revenue model, it cannot adopt a staking-to-share-revenue model.

Audius has both advantages and disadvantages. Its strengths lie in its efforts to move towards decentralization, allowing users to upload works without review, and using a Web 2 email + Web 3 wallet login method. The open API allows external apps to access songs, among other features. However, the downsides are evident; the lack of review for uploaded music may lead to copyright infringement and content safety issues, and music on Audius cannot obtain copyright protection, nor is there a clear income plan for creators. In summary, Audius still needs to improve its economic model. Future Circulation of Audius Price Changes of Audius 4. Pianity: A Music NFT Trading Platform Built on Arweave Pianity is a MusicFi NFT trading platform built on Arweave, mainly involving the primary market issuance of NFTs. Currently, Pianity does not support users selling related NFT products to each other, but a secondary market will open in March, where musicians can receive 8% royalties. NFTs on Pianity are divided into four levels, with different quantities, and the issuance quantity and price depend on the musician. Currently, Pianity's music NFTs do not enjoy copyright dividends.

Currently, Pianity has an internal circulating token PIA, which has not yet been issued, with a constant price of $0.1. Users can purchase NFTs on the platform using ETH, USDC, etc., and the official will periodically distribute PIA token dividends based on the total value of individual NFTs divided by the total value of NFTs held by users on the platform.

The PIA token is primarily used for purchasing NFTs, and the project team frequently issues activities where users can buy NFTs with PIA and receive returns. Currently, there is limited information available, and the platform's economic model is acceptable, but the project team needs to gradually improve related information. Transaction Volume Since Pianity's Launch 5. Sound.xyz: Significantly Improving Musicians' Income Levels Sound.xyz focuses on being the primary release platform for Web 3 musicians' works. Currently, Sound.xyz only supports primary market transactions, and purchased NFTs can only be traded in the secondary market on platforms like Opensea, with relatively low liquidity for MusicFi NFTs and small trading volumes in the market. Additionally, a highlight of Sound.xyz is that after users purchase NFTs, they can leave public comments to share their thoughts on the work, enhancing interaction between artists and musicians.

Sound.xyz significantly improves musicians' income levels. According to sales data from Sound.xyz over the past 30 days, among 69 musicians, over 54 musicians had monthly incomes exceeding the U.S. minimum wage of $1,400, with more than half of the musicians earning over $6,000 in the past 30 days, and many musicians did not release new works this month, yet their monthly royalty income already exceeded 3 ETH. Compared to traditional streaming music platforms, Sound.xyz has indeed achieved a significant improvement in musicians' income levels.

However, the entry of musicians into Sound.xyz is by invitation only, so some of the musicians who have joined can be considered rising stars or top performers in the industry, which may not universally improve the income of all musicians. Sound.xyz Music Comments Over 54 Musicians Earn More Than the U.S. Minimum Monthly Wage 6. Opulous: A Royalty Platform Combining Music NFT and DeFi Opulous features a royalty platform along with Music NFT and DeFi. Opulous's main business includes primary issuance of music NFTs, secondary markets, royalties, and DeFi. Users who own NFTs automatically receive royalties from the musician for that music, a service that other music trading platforms have not yet ventured into.

Additionally, Opulous's highlight is its DeFi loans, where musicians can use the royalties from projects they create in the future as collateral to borrow assets from the platform. The platform also supports using stable royalty music NFTs as collateral to obtain corresponding loans. This DeFi product greatly enhances the liquidity and applicability of top music NFTs, beginning to build a Lego-like application layer for music NFTs.

$OPUL's overall empowerment is adequate. The functions of OPUL mainly include: 1. Settlement tokens for buying, selling, and minting on the platform 2. Staking 3. Liquidity mining 4. Governance, etc. Overall, token empowerment is adequate, but the staking function has not yet been launched. Once the staking function is introduced in Q2 to share platform profits, the token value is expected to rebound. Opulous Economic Model OPUL Currently Has Low Empowerment and Weak Price 7. Melos: Supporting Secondary Creation, Stimulating Music NFT Development Melos differs from other Music NFT exchanges in the market by focusing on streaming music creation. Its trading aspect is similar to that of other exchanges, where listening to music is free, but holding NFTs does not provide additional benefits such as royalties.

Its exciting part lies in its creation and secondary creation features. Users can upload a piece of music or create a segment using an electric piano to generate an initial NFT (New Forge).

Subsequently, users can create new sub-NFTs (Jam Forge) through secondary creation of that music NFT. The on-chain Musicblock records the relevant DNA and GEN generations of each NFT. DNA includes information about the author, creation, and provenance, while Gen represents the generational level. Melos greatly stimulates the development of music NFTs and ensures the process of rights confirmation through on-chain provenance.

Melos Music Creation Interface

Current Trading Volume is Rapidly Increasing, Enhancing Liquidity 8. Melos: Good Token Empowerment, Future NFT Trading Volume and Price Growth Melos's token empowerment is strong, and future price increases are expected as the music NFT market improves.

1. 50% of the transaction fees obtained from Melos's music NFT market will be used to buy and burn Melos tokens, while the remaining 50% will be allocated to the treasury.

2. Users can purchase NFTs minted by other users in the creation studio, and then stake that NFT as a node, staking a certain amount of tokens in the node to earn additional rewards. The rewards for staking NFTs and the additional rewards from staking tokens will be distributed daily based on the overall staking situation across the platform.

3. 20% of the tokens in the aforementioned staking pool will be placed in Uniswap to provide liquidity.

4. Token holders will periodically receive dividends from exchange transaction fees.

5. Users minting music NFTs will receive a certain amount of token rewards.

6. KOLs and community contributors will receive token rewards. Overview of Melos Economic System

4. Review from DeFi to SocialFi

1. Where is the Future of Web3 Music: Insights from DeFi and GameFi Web 3 music has four sub-sectors plus music NFTs, making a total of five sectors. We carefully consider how Web 3 music NFTs will develop.

Before analyzing this question, it is worth looking at the successful and failed experiences of mature application layer sectors like DeFi, GameFi, and some established SocialFi.

After experiencing the DeFi summer of 2020, DeFi began to explode on a large scale. The core reason DeFi did not explode before 2020 was:

1. How to find initial users and startup capital.

2. The high listing costs on CEXs, which significantly increase prices and liquidity after listing. The solution to these issues was liquidity mining. Liquidity mining creates a snowball effect through "token price increase ------ APR rise ------ more users see the APR rise and quickly enter ------ token continues to rise," but if the logic chain collapses in the middle (usually due to fewer users entering and selling pressure exceeding new entries), it can lead to a death spiral.

Therefore, the star projects we currently see are those that, after subsidies, have real user demand for the product. Such projects address users' genuine financial needs in Web 3 rather than creating an environment that necessitates this demand.

The autumn of 2021 saw the explosion of GameFi. The core factor behind GameFi's explosion was that users from third-world countries, facing income reductions due to the pandemic, needed income to support their families. At this time, Axie provided such users with an opportunity to earn.

After Axie's income surpassed that of Honor of Kings in July 2021, GameFi fully entered the world of crypto users. GameFi has a stronger Ponzi-like nature, with a growth logic similar to the death spiral of "users enter ------ token price rises ------ earning increases ------ attracting new users to buy tokens and NFTs ------ token continues to rise."

However, with the collapse of Cryptomines, which accounted for 1/4 of daily trading volume on BSC, GameFi 1.0 gradually came to an end, with only a few old GameFi projects still struggling to survive. Unlike DeFi, which genuinely addresses users' financial needs, GameFi 1.0, represented by Axie, is more of a special product born from the FOMO sentiment during a bull market, created to cater to Web3 users' addiction to APR. Most remaining GameFi projects are grand narrative platforms and metaverse games. 2. Where is the Future of Web3 Music: Insights from Similarities with SocialFi The logic of SocialFi differs from that of DeFi and GameFi, but it shares similarities with MusicFi, as both are based on leveraging the influence of celebrities/musicians to purchase related fan tokens/NFTs. The logic of SocialFi can be simplified to: if a celebrity wants to monetize their social capital (gain tokens), they need to spend time and money proving the value of their social capital (POW proof of work). This is similar to the logic of BTC/ETH, indicating that blockchain-based Web 3 is very suitable for the development of SocialFi.

In essence, SocialFi can be understood as celebrities (or individuals) leveraging their influence to build their social capital (i.e., personal brand reputation) while also seeking benefits for their fans.

However, this logic also leads to significant issues in SocialFi:

1. Aiming for decentralized social interaction, but fundamentally failing to achieve true decentralization (a few celebrities can create a very strong social monopoly).

2. Content mining is very difficult to define for social platforms.

3. For social platforms and token distribution platforms, the empowerment of platform token value is quite important.

4. The user base is small. Currently, SocialFi still has a long way to go for development, with a small sector scale, relatively primitive mechanisms, and few Web3 natives willing to use products that provide poor experiences.

Overall Review of the Crypto Sector

5. Conclusion

In summary, the four sub-sectors of Web 3 music plus music NFTs represent five sectors, with more certainty in sectors related to royalties, streaming media, and creation platforms. The role of music NFTs lies in listening, collecting, supporting idols, and royalty distribution.

Excluding music NFTs issued by top musicians that include royalty distribution, most music NFTs have weaker display scenarios and bragging attributes compared to JPG NFTs. However, when top musicians issue NFTs with royalty characteristics and users gain significant benefits, the music NFT sector is likely to experience an explosion.

The entire Web 3 music sector has significant potential. Streaming and creation platforms can collaborate with major musicians on the IP side, using token incentives to achieve Listen to Earn and Create to Earn, becoming the Web 3 equivalent of Spotify or QQ Music.

The emergence of royalty platforms aims to address the complexities in the traditional music industry chain, providing musicians with better tools to solve the issues of low, delayed, and opaque royalty distribution. The development path of music NFT trading platforms may be relatively unclear due to the inherent weaknesses of music NFTs compared to JPGs and the current dominance of Opensea.

The issues in the entire sector still exist:

1. From the user side, the number of Web 3 users is still relatively small, and even fewer users are willing to spend their limited time listening to Web 3 music, with even fewer willing to spend real money on NFTs without royalties.

2. From the IP side, there is a lack of leading stars like Taylor Swift and Jay Chou, with current Web 3 musicians being relatively long-tail.

3. From the project side, many projects have imperfect economic models, and token empowerment is weak, making the projects seem more like "I created this environment, so users should have this demand." Music projects with strong social characteristics are similar to SocialFi. When SocialFi project tokens have poor empowerment and begin content mining with a cold start, the result is that users start generating unlimited low-quality content, leading to a death spiral of limited entry and withdrawal. Therefore, when music projects begin Listen to Earn and Create to Earn, if they do not provide token value, a death spiral may also be the final outcome.

When evaluating projects, it is difficult to assess the number of users in the crypto world, but we can evaluate:

1. Whether the project team has star IP. Without star IP, relying solely on numerous long-tail musicians for a cold start will yield very poor results (i.e., low NFT trading volume).

2. Whether the project team understands Web 3 when they have star IP. If they rigidly apply Web 2 music models to Web 3, it is likely to fail.

3. Whether the project team's economic model is reasonable. Currently, most project economic models are not particularly outstanding, with token empowerment limited to staking, governance, or mining, and few can achieve trading payments or significant popularity. Outstanding aspects can include trading payments, requiring tokens for listening, platform profit sharing, and various reward methods.