By now, you should have heard of non-fungible tokens (NFT) and the change they are driving in the art and music world.

The space is moving very rapidly, and economic models for scarce digital media are emerging. Musician Grimes has sold her art print for $6 million, DJ 3LAU sold out a crypto-digital music album for $11.6 million, Beeple’s NFTs are currently in auction for $3.5 million at art-house Christie’s while Nifty Gateway had a single one of his pieces go for over $6 million. Even more interesting is the impact on royalty models and intellectual property ownership.

The Eulerbeats project, which pairs algorithmically generated music with artworks, has driven nearly $2 million in royalties paid to owners of the original musical collectible, separate and apart from the initial issuance. 

People who understand modern media, like Mark Cuban and Gary Vaynerchuk, are also both in. We are not saying that we should just listen to influencers and blindly follow. For example, John McAfee was very … vocal … about promoting token offerings in 2017, and has now been charged with a $13 million fraud. But the core difference here is that McAfee was shilling projects for personal gain. In today’s cycle, industry participants are realizing the core change in market structure, and describing it to others. So let’s break down what that change really is.

We are over 20 years into the internet revolution. What is clear is there is not just one technological change, but multiple waves of transformation. Each carries with it a social and philosophical outcome.

We thought that open, endless access to the world’s media would be fantastic and freeing. That we would have an intellectual and scientific Renaissance as a result. And to some extent, that has indeed happened. But it has happened at deep cost.

First, let’s just describe the “it.”

Starting with the chart on the right above, picture the Supply and Demand of music. You can use the same shorthand for other information, like books and newspapers. This is supply and demand in the physical world at the aggregate level for the industry. So you might sell 1 million CDs for $12.99, but only 500,000 CDs for $15.99. Based on those slopes and elasticities, some aggregate amount of production and commerce occurs.

Now we introduce Napster. The price of an individual CD or song goes to $0 for those who know how to use peer-to-peer file-sharing software. That averages out to non-$0 in the population, but we know a revenue pool collapse of 50% or more actually occurred. The shape of the supply curve is remade by “democratizing” technology. At the much lower price, we shift down the Demand curve to a much larger consumption of media. Today, that includes all of YouTube, TikTok, Spotify, and the long tail of services. There has been a massive demand side expansion along the curve from technology.

See also: How NFTs Became Art, and Everything Became an NFT

As a result, there has also been a collapse in artist revenue pools (i.e., quantity times price). We won’t belabor how little musicians earn from Spotify too much, but an illustration is provided below. You get $4 per 1,000 streams, and would need about half a million streams to make a living wage in the United States.

We also footnote that the digital rights management efforts of the 2000s was an effort by the music labels and the publishers to take back control of p2p distribution. Despite Metallica’s best framing, it was *not* a grassroots effort by the artists that directly benefited the creators. DRM was an attempt at preserving intermediation.

Now a lot of creators actually love the huge audiences they are able to access and are allergic to any sort of capitalist overlay for the remix culture of the internet. Part of being techno-literate over the last 20 years has meant being pro-file sharing. It has meant supporting the destruction of walled gardens, going open source and removing legal barriers, and even ending the concept of ownership.

See also: What Are NFTs and How Do They Work?

Blockchain-based NFTs reintroduce the concept of property rights into digital media markets, and they do so through software-enforced capitalist logic. One can own art again. Is that good? Is that bad? That remains a philosophical question.

In revisiting our toy model, the core provision of endless music to the market has not changed. Instead, we add on a new market for ownership. It is one thing to experience a song by listening. It is another to own the original print and its underlying economic earning power. There is now a steeply expensive, very niche market of digital objects. There is also now a change in the demand curve, such that there are some collectors and purchasers that – all of a sudden – have the desire and capacity to participate in the new market. Many of these participants are crypto rich, collecting status and binary options.

Conceptually, we are also bringing media to financial markets, joining creative output and its $10 billion per year financialization. In the traditional markets, this would be something like the Hipgnosis Songs Fund.

Digital streaming services are growing over time and have fixed the publisher’s revenue problem. At scale, there is sufficient income generation from owning the rights to songs, and the different type of royalties that they generate (e.g., mechanical, performance and so on). 

You can see also the massive asymmetry between distribution and manufacturing. Today, most value is sitting with the storefronts. This is the thing that will potentially change. Much more value could be sitting with the artists, who increasingly have a direct relationship with their fans through social media.

See also: 11 Projects Building a Strong Foundation Beneath the Marriage of DeFi and NFTs

Putting the royalty economics on-chain, and turning those into a liquid market connected into decentralized finance is a pretty large paradigm shift. You could own the royalty stream. You could collateralize it to take out a loan. You could stake it as an object that allows you some governance rights. You could create a portfolio or basket of various creative objects, and turn them into an index that generates dividends. You could lever up that index and buy downside protection. And so on.

As an example of this already, NFTX is a DeFi project that has bundled CryptoPunks into indexes, which can be purchased in a fractional manner. As CryptoPunks sell for millions of $, they become inaccessible status symbols. But, if you want to diversify your portfolio with exposure to some original blockchain-based assets, PUNK-BASIC or PUNK-ZOMBIE stand in as derivative exposure backed by the NFTs.

In the medium to long term, there will be an oversupply of tokenized art. Creators are realizing they have an asset they can sell directly to their audience, and this is still quite novel. Once all creators realize this, supply will go through the roof. Thereafter the novelty of collection will wear off, and it is likely that demand will also settle back down. Prices will reach some other equilibrium than the one we are seeing currently. Yet, early adopters have the opportunity to grab a share and to innovate their way towards new platforms.

It is with this lens, for example, we should look at the acquisition of Tidal by Square from Jay-Z. Tidal has 70 million songs and 250,000 videos, and is being majority-bought by the payments processor for $300 million. According to estimates from ARK Invest, Tidal runs around $170 million in revenue, and has 1 million to 2 million subscribers paying $13 per month.

Why does a mobile wallet want to own this property? In part, the customer acquisition strategy for Cash App has been through influencers and the hip hop community, including by giving out bitcoin to followers. This is a massive leverage growth hack.

Square is buying a unique go-to-market strategy. It is also getting a lot of artists as customers, who are in essence running small businesses. Being a small business banking alternative, Square is well positioned to (1) bank and monetize the creators, and (2) then use the voice of the creators to grow adoption of Square itself.

This is CEO Jack Dorsey playing five-dimensional chess. As another example of the same insight, look at his other company, Twitter’s, roadmap to add paid subscription (“super follow”) features of its own content creators. In building financialization into the social network, the company is taking economic share back from third party tools that aggregate and represent influencers. Instead of ad units disappearing into direct messages and talent agencies, Twitter becomes both a creative and a financial platform.