Tag: DeFi

How tokens could revolutionise the creators economy

gigiuliani1 Comment

Creators economy is the “new hit” in Fintech: all the main VCs are jumping on this vagon, new startups are raising millions trying to build for this underserved market, Square just bought Tidal and thus a creator base of millions of users and, impossible to forget, Non-Fungible Tokens NFTs are everywhere right now.

Much is indeed happening in the creator economy space, but I believe that the biggest impact will come from the interaction of these users with the wider token economy. 

My thesis is that the sector’s structure and dynamics will be completely reshaped by the tokenization of the creators’ revenue stream and their sale to a plethora of investors/fans. And that this model will be potentially applicable to other categories (like solo-preneurs and SMBs).

The status quo

Imagine being a London-based musician with around 10M streams/year on Spotify, somebody like Tom Rosenthal, one of my favourite songwriters.

Considering that Spotify pays $0.00437 per stream to artists and that Tom generates around 10-12M streams/year, Tom will very likely earn in the range of 50,000$ to 60,000$ per year from this streaming service, and this cash flow will likely be stable, with some minor adjustments, over the years.

But imagine Tom entering his local Barclays branch to ask for a loan – he wants a new car. I doubt that Barclays will accept his Spotify future revenues (partially predictable by the Spotify stats) as a collateral for the loan. Yet, those stats are not really that different from my N26 employment contract: in both cases, it is a guarantee of cash flows that we will receive in the future. Yes there is always a measure of risk in the future, in this case that people will stop listening to Tom’s music on Spotify or that my relationship to N26 changes (they can fire me/I can resign/the company can stop operating).

The paradigm would be the same if you take a Youtuber, or an Instagram influencer. 

Essentially, today’s financial life for a creator – unless they are in the star league – is not easy: the market is clearly underserved and the reason is that very few financial institutions have the sophistication to consider creator’s activities as a financial asset.

As mentioned in one of my previous posts, this is partially due to the fact that music assets are very illiquid: banks can hardly monetize the claim on the revenue streams in case the borrower defaults. 

The issue is mitigated by some specialized firms (Royalty Advance, Sound Royalties, Lyric Financials or The Music Fund) but the experience is not optimal for creators. It is quite fragmented and very limited to the cash advance use case.

A new token-based model

Enter the Square-Tidal deal. A few weeks ago Square bought one of the most prominent music services around definitely the most popular in the artists’ community. 

The Tidal acquisition makes total sense for Square from many point of views. First, it’s a great marketing strategy as it brings Square closer to many creators in a way that resonates well with its Cash app customer base. Then, it adds over 1M new potential users to Square. But, in my opinion, the most important reason for the acquisition is the opportunity to fix the financial experience for music creators: setup a new model that could reshape the financial dynamics around the music industries and, eventually, for other domains.

Imagine the following scenario: after being disappointed at the Barclays branch, Tom goes online on his Tidal account where he receives his streaming revenues in the form of a Tokenized money stream, without having  to wait the end of the quarter/period. Tom could add all his artist accounts to Square and Square could then model the value of Tom’s future revenue streams, thanks to the streaming data provided by Tidal, and issue a `Streaming revenue token` that will entitle the owner to receive the next X months of Tom’s revenue flows.

This Streaming revenue token (SRT) could be sold to his fans on Cash App, who would probably pay a premium due to the emotional attachment to their music idol. Or the SRT token could be sold through Square to investors. (NOTE: This is not very far from what companies like Pipe.com are doing for SAAS Financing).  Indeed, the SRT could even be used in a DeFi lending protocol as a collateral. 

Imagine if Tom could easily create some unique perks directly from Tidal in the form of NFTs, in a way similarly to what Kings of Leon are already doing.

All these features would make Tom’s financial life much easier, he would have a single touchpoint to manage his professional/financial life, Square+Tidal would simply would become the center of gravity of Tom’s professional life. But, more importantly, his personal balance sheet would expand, because his asset side will be bigger – as all his future income could be included there. Thus, Tom would have a much higher disposable income, as people will be happy to extend more credit to him. 

What I described above, resonates really well with the hyper-financialization of society always presented as the killer-application for DeFi. This is what happened during the 20th century with the most important socio-financial innovation of history, the mortgage, and this what eventually could happen again through the token economy.

If we zoom out from music and apply the same paradigm to other creators’ categories the model is fully coherent, and it would bring incredible value to these professionals.

A new industry standard?

At the end of the last century French political advisor Jacques Attali wrote a fantastic book: “Noise, The political Economy of Music“. In the book Attali goes through different phases of musical production and pushes a very strong thesis: music has a prophetic power to anticipate social formations and future mode of production that will then be adopted by the rest of society.

From the forewords of the book:

[Attali] is the first to point out the other possible logical consequence of the “reciprocal interaction” model—namely, the possibility of a superstructure to anticipate historical developments, to foreshadow new social formations in a prophetic and annunciatory way. The argument of Noise is that music, unique among the arts for reasons that are themselves overdetermined, has precisely this annunciatory vocation; that the music of today stands both as a promise of a new, liberating mode of production, and as the menace of a dystopian possibility which is that mode of production’s baleful mirror image.

Fredric Jameson

I believe that today all the premises are there for a new organizational model in the finance of the music industry, based on a more liquid market and a more sophisticated financialization of society. 

Considering the widespread value that this new interaction model could bring, and the prophetic nature of the music industry, there are chances that a new hyper financialization paradigm will extend to many other industries: solopreneurs, artsy side-hustlers and SMBs. 

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Beyonce and Monet: the first mass market app for DeFi

gigiuliani1 Comment

Over the last few months, the Decentralized Finance ecosystem has grown at an impressive pace: every single metric you can look at shows double digits growth on a month by month basis.

DeFi Users over time – source: Dune Analytics

This is a great achievement, but it is a fact that so far speculation or high risk financial incentives have been the main adoption drivers for Defi (and the wider crypto space). This isn’t negative per se, as it led to the creation of interesting applications and facilitated the evolution of a proper ecosystem, but this is not enough to get to 100 million users. To get to 100 millions users a new set of use cases must be developed. The argument of this post is that DeFi has a great opportunity to build products in fringe alternative asset classes, in particular music royalties and art.

Fringe alternative classes today

In a world where interest rates are sub-zero, single digits return asset classes are extremely interesting for investors. In this scenario, music royalties and pieces of art – with a total asset base estimated north of $ 3T – are becoming more and more appealing for investors.

These “creative asset classes” are dominated by institutional or hyper-wealthy investors, with essentially no access for retail investors. A Robinhood for art and music asset classes simply doesn’t exist. Some marketplaces in these spaces (Masterworks.io for art or Royaltyexchange.com for music, Otis for collectibles) are live but they present some clear entry barriers: fractional ownership is not always guaranteed, their catalogue is limited, they are invitation-based and not open to the wider market.

Music, Art and Blockchain

Music and Arts are not new problem spaces for blockchain, as many projects have been focused on innovating those two domains using DLT applications.

On the music front, there are various companies that are re-imagining how the music industry can be improved. Noticeably among them is Paperchain – a payment solution that shortens the payment cycle for creators, based on their streaming stats. 

On the art scene, NFTs are probably the hottest thing in crypto today. Non Fungible Tokens are unique and not interchangeable tokens, the opposite of cryptocurrencies where every token is interchangeable and not unique. NFTs have been used to create digital scarcity in several specific applications that require unique digital items like crypto art (Cryptopunks), crypto-collectibles (CryptoKitties) and crypto-gaming.

An example of Cryptokitties

Over the last 6 weeks a number of incredible deals took place, with thousands of Eth (millions of $) spent to buy NFTs from groups of digital artists and the NFTs asset category really taking off (you can find an overview of the topic here). 

Four of the Hashmask NFTs sold last week

These new projects are tremendously cool and highly innovative: they are exploring the concept of value in relation to physical objects and their ideal counterpart (ideal in Platonic terms), and are pushing the frontier of arts and capitalism to unexplored territories.

Anyway they are complex products: hard to discover and even harder to understand, far removed from our neighbours, the Joes and Janes on planet Earth. I’m sure NFTs will grow exponentially and will probably be the coolest thing in crypto in 2021, but they won’t drive mass market adoption – if not for other speculative reasons.

A mass market approach

Imagine a scenario where a popular crypto aggregation point with a wide distribution (an exchange/wallet like Coinbase or Argent) decides to onboard a new type of tokenized asset: the streaming royalties of the latest Beyonce album.

This token will probably be an ERC20 compatible token that can be traded over the Ethereum blockchain. Based on the number of Spotify streams the token will generate a steady cash flow over time, and the same asset could eventually be used on Aave, Compound, MakerDao to get a loan.

An hypothetical Beyonce token on Coinbase

My sense is that a number of elements could make this feature a mass market one:

  • Better UX: considering the amounts of barriers to entry to the art/music marketplaces presented above, it would be much easier for Joe or Jane to download Coinbase and buy the Beyonce album token in a few taps. This token would promise higher returns than the vast majority of asset classes today, it would be much more liquid than an investment on Royalty Exchange and could be used to get access to other financial products (it could be a potential collateral).
  • Better distribution: Coinbase is a fairly popular app, so it wouldn’t be too problematic for the average investor to get the news that it is possible to buy a Beyonce token.
  • Emotional attachment: fans would be in a unique position to show their affection and support to their favourite artists, this would create a bondage with the product that cryptocurrencies will never achieve at scale. This feature would move crypto beyond arbitrage and utility, towards a more popular movement (not far from what happened two weeks ago with Gamestop and r/Wallstreetbets)

Conclusions

What DeFi and the decentralized finance movement achieved so far is incredible, but this is still a tiny fraction of what traditional finance moves every day. To attack the traditional financial system I believe that a typical strategy of the classic startup theory should be followed: optimise for an underserved niche, dominate that segment and then move on to the next one, one by one till conquering the entire financial space. 

Especially in a post-pandemic world that craves owning emotions, Arts and Music could be powerful hooks.

Thanks to my friends Angelo Min Tagliabue and Luca Cosentino for their kind and extremely valuable review of this post.

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