Is Music Fandom x Financial Speculation Inevitable in Web3?
Applying Scott Kominers and Jad Esber’s two-token framework to build healthy music communities
One of the criticisms that often gets thrown at web3 is the financialization of everything. Introducing tokens to a project might convert authentic fandom to mere financial speculation and all art will become entertainment. Joe Sparrow of Musically recently wrote:
“do people in the music industry really want to head into a future where we all play at being Wall Street traders, balancing risk against reward to increase notional value?”
This criticism is a valid and concerning one. Something I’ve written about this previously as well:
Does a fan invest to support the artist? Does the fan invest in hopes of future financial returns? Fans and financial investors may have very different interests and NFTs weave those two groups together. Who someone decides to support financially may not necessarily be linked with whom they are a fan of.
With my supporter hat on, I’d probably buy NFTs offered by artists I’m a fan of. Amazing folks such as Feng Suave and Sports Team. With my investor hat on, I’d probably think it's a better bet to invest in Adele, or Lorde, or Taylor Swift!
And this is precisely what most music consumers might do. The large majority of music consumers will decide to invest in “blue-chip” artists rather than making more riskier investments in the obscure, experimental, and alternative acts they love. (but clearly don’t trust with their money!)
The question is: is the convergence of fandom and finance an inevitable outcome in web3? I used to think so. But I was wrong.
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Let’s understand why fandom and finance tend to converge in web3 first. In most web3 projects, tokens (fungible or otherwise) derive their value by:
Signalling Reputation: possession of tokens acts as a powerful reputational signal. It signals your status to other community members. Certain tokens are air dropped to early community members and validate their reputation as respected old timers. We know how powerful this can be in the context of music: fans squabble about who discovered artists first and who their biggest fan is, etc. This status signal only gets amplified when communities and cultural contexts are interoperable. Having a $STREAM token not only acts as a status signal within the Water & Music community, it also acts as a status signal within FWB, SeedClub, and so on.
Providing Liquidity: possession of tokens also helps individuals financially – early contributors who were compensated with the community token can sell them in the open-market for fiat currency to pay their bills in the “real” world, buy unnecessarily expensive espresso machines, etc. This is where the financial speculation aspect of web3 comes in—something many people (including Joe Sparrow and myself) have expressed concern about.
The value of any token is largely determined by these two factors. If the tokens your community issues can’t be used to signal reputation or be exchanged for ‘actual’ money, nobody will engage with it or your community.
Herein lies a paradox: brilliantly formulated by Scott Kominers and Jad Esber:
..if a token can be transferred easily, then those without reputation can simply purchase it, which reduces the token’s ability to serve as a reputation signal.Making reputation tokens transferable not only reduces their ability to serve as a signal of reputation, it can also diminish their ability to serve as valuable compensation. Thus, establishing reputational capital requires fully (or at least mostly) non-transferable tokens. The question, then, is how to translate reputation into liquidity.
If a token is liquid, i.e. if anybody can buy or sell it freely, it devalues its first function as a reputation-signal. Reputation doesn’t mean anything if it can be bought or sold. On the other hand, if the token is a very very strong reputation signal which can only be earned and not traded, the token is less liquid and overall capital deployed in music x web3 reduces. (total capital deployed in any asset class is strongly correlated to it’s liquidity)
This is the defining challenge of reputation-based networks: Lean too much towards liquidity, and music fandom becomes mere financial speculation. Lean too much towards reputation, and music fandom loses its financial utility.
How do we solve this paradox? Or more specifically for us in the music industry, how do we financially incentivise and reward genuine music fandom instead of going down the art equals finance equals entertainment route?
Scott and Jad proposed a framework inspired by the gaming industry. They devised a two-token approach similar to the “points” and “coins” systems that many games have:
We propose a two-token reputation system, whereby one token, which we call “points,” serves as a non-transferable reputation signal. A second token, “coin,” is a transferable asset dispensed to holders of points on a regular cycle. Effectively, points spin off dividends in coins that can be used as tradable currency. Moreover, because coins accrue to holders of points, coins also have a link to the underlying reputation.
At a high level, this design promotes a feedback loop whereby users derive points from high-quality contributions on the platform such as contributing content, moderating, or winning gameplay. And then, when the users with points receive coins, they can be traded as a currency. Users’ demand for coins drives the need to acquire points, which in turn incentivizes high-quality contributions.
Points are earned via high quality contributions in the community. This could entail being active on an artist’s Discord server, attending concerts, buying merch, etc. Points will help fans build up and signal their reputation within their favourite artist’s community. Points will serve as powerful signals within these communities because points can only be earned through action and cannot be bought or transferred. Artists will also be able to use these to identify their most authentic fans. Not just their most affluent ones.
Artists have the ability to decide how fans earn points. Meritocracy can be embedded. Or not. Instead of the 26yo who spent $300 for a ticket, maybe the 16yo who spent an entire afternoon helping with the community town hall on Discord deserves more points. Artists can play points god here. Needless to say this is an important step. How artists decide to structure the points system will determine the fundamental status-dynamics of the community.
Points earned by fans will entitle them to coins—distributed pro rata based on the number of points they have. Coins will have the ability to be traded in the open market for fiat currency. An artist’s Discord Community Manager will earn points based on their work for the community. These points will entitle them to coins. These coins could then be traded for USD, EUR, etc. if needed.
Coins are crucial because they provide liquidity to community contributors. Fandom is real but so is rent—compensating contributing fans fairly and transparently will incentivise new members to join, and keep community engagement high. Distribution has to be aligned with the artist’s vision for their fan community. Factors such as the cadence with which coins are disbursed to points holders, whether its pro rata based on the number of points or tiered based on roles, etc. will change community dynamics.
This enables a positive feedback loop. Demand for the coins in the open-market would increase demand for points, thereby incentivising fans to get involved more proactively, making high-quality contributions within the artists community. Genuine music fandom is financially incentivized and the risk of fandom becoming mere financial speculation reduces significantly.
Reputation within communities becomes non-fungible. Financial capital becomes fungible.
Web3 has forced us to rethink the artist-fan relationship in a fundamental way. Setting up a tokenized community may seem daunting to artists who think it may over-financialize their careers—their creativity beholden to the whims of their fan communities.
The two-token framework lets artists financially incentivize and reward genuine fandom, without letting their communities slide into mere financial speculation and inauthenticity. Happy to have been proved wrong in this case.
What I’m Listening To
Best album I’ve heard so far this year. I’ll just leave it at that.
Really great insight into what western companies don’t understand about “emerging markets” and how this apparent gold-rush may not actually be one.
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Until next time,