Continuing to find practical use cases for DeFi: Allowing musicians to advance their income from Spotify.

The bustling "industry blockchain" is always associated with consortium chains? Not necessarily. We want to tell you that using Decentralized Finance (DeFi) can also empower traditional industries. Listen to how DeFi practitioner Paperchain founder achieved it: advance payments for musicians from Spotify.

Interview/Written by: LeftOfCenter

In 1997, the glamorous rock musician David Bowie launched "Bowie Bonds", using the royalties from all albums released before 1980 as collateral to issue bonds, which were later purchased by Prudential Insurance Company for $55 million. The 10-year bond had an interest rate of 7.9%, about 1.5 percentage points higher than the market benchmark U.S. Treasury rate.

At the time, this transaction was quite advantageous for Bowie because it allowed him to advance ten years of royalties and licensing fees without relinquishing ownership of his songs.

"Bowie Bonds"

This was a bold financial experiment. Before this, packaging illiquid assets into bonds was common in housing and auto mortgages, but David Bowie was the first to use this method for music copyrights, pioneering the packaging of intellectual property into financial products. This move received praise from many financial experts as he truly understood the value of intellectual property.

Today, streaming has become the mainstream mode of music consumption. According to the Consumer Technology Association's forecast, the U.S. music streaming industry is expected to reach $9 billion in revenue in 2020. However, this may not necessarily be good news for musicians: the rise of streaming often significantly impacts album sales for musicians, resulting in a sudden drop in income; moreover, due to the complex income distribution process in the streaming supply chain, musicians often have to wait six months to receive income from platforms like Spotify.

Coincidentally, similar to "Bowie Bonds," the New York-based startup PaperChain aims to advance income for cash-strapped musicians and labels through innovative financial means, unleashing the liquidity and potential of these funds. However, PaperChain has chosen blockchain, or more precisely, DeFi—the solution for decentralized finance!

While consumers of streaming music enjoy instant music and video consumption, content creators are struggling as their income payments are constantly delayed.

The way people consume media has changed significantly. With just a smartphone, one can access a vast amount of music on streaming services like Spotify and endless videos on YouTube, all in real-time. However, the income for the creators of this media is not immediate.

Currently, every stream play by a user on a streaming platform should generate a "micro-transaction" income, which is then distributed to labels or musicians in the streaming music supply chain. The streaming music industry is experiencing rapid growth. According to data released by the Recording Industry Association of America (RIAA), the revenue of streaming music platforms in 2018 increased by 30% year-on-year, reaching $7.4 billion. However, due to the complex income distribution mechanisms of major streaming platforms, income from platforms like Spotify is usually distributed to labels after 3 months, and it takes 6 months to reach the musicians.

The process from user play generating profit to the final payment to creators in the streaming music consumption model

This issue is not just limited to the U.S., it is a global problem fundamentally rooted in the industry structure. This industry structure problem is expected to be solved by blockchain and open finance.

A startup company from New York, PaperChain, aims to solve this problem through DeFi protocols. Their method involves analyzing data to estimate the value of data generated by musicians on these streaming platforms, then matching the revenue evaluation of these streaming platforms with efficient and low-cost funding sources, which come from a series of decentralized financial protocols that do not require permission to borrow encrypted assets.

According to PaperChain's CEO and Co-founder, Daniel Dewar: "We believe that decentralized finance can provide an effective mechanism to obtain funds and issue low-cost loans."

This is not just talk; they have already taken some practical steps. At the 2019 London DeFi Summit, Paperchain successfully provided an unnamed client (an unnamed label) with $60,000 worth of stablecoin Dai in advance as Spotify income. Compared to the 90-day process, the entire process took less than 30 minutes, with a transaction cost of less than $3.

So, how did PaperChain, which itself does not involve blockchain, let alone DeFi, help its clients (music labels and musicians) solve the problem of instant payment?

PaperChain is a fintech company that provides data analysis services to musicians on streaming platforms, which is just one part of the entire solution process. From the overall process perspective, this is a typical case of using decentralized finance to solve supply chain finance, more specifically, borrowing funds from DeFi lending protocols and providing them to musicians and labels whose income is delayed.

This pilot project was completed jointly by PaperChain, the Maker Foundation, and the German supply chain blockchain project Centrifuge. The pilot project took place on the Centrifuge platform, ultimately integrating the Maker lending protocol to lend out the stablecoin DAI to labels.

As previously reported by ChainNews in "How to Expand DeFi Beyond a Small Circle Game? You Might as Well Look at Its Real Industry Applications," Centrifuge is a startup company that focuses on using DeFi to liberate the liquidity of assets in the supply chain finance sector. Having worked in supply chain finance in the internet field for many years, they realized that the previous solutions had reached the limit of centralized supply chain finance development and turned to blockchain technology as a solution.

In this specific case, the Centrifuge solution process happened as follows:

1. Future stream revenue is given a certain value performance, which can be realized by Centrifuge platform as NFT tokens.
2. Through Centrifuge's decentralized application called "Tinlake," over-collateralize NFT assets, borrow CVT (Collateral Value Tokens).
3. Within various DeFi lending protocols that integrate Tinlake (such as Compound and Maker), lock in CVT and borrow stablecoin DAI.

Pilot operation full process

In this process, PaperChain, as a data analysis company, only participates in one part, acting as an underwriter and loan initiator. In other words, PaperChain conducts credit assessments and provides guarantees for musicians and label revenue. As an underwriter, the main responsibility is to underwrite, evaluate, and maintain the balance of collateral, mainly referring to the risk estimation of future revenue for creators on streaming platforms, setting corresponding interest rates and collateralization ratios, valuing the NFT collateral, and determining the loan amount that musicians can withdraw. At the same time, PaperChain also acts on behalf of clients as loan initiators, initiating loans.

PaperChain has algorithms and machine learning analysis models that can analyze the future streaming revenue of musicians, enabling precise risk prediction and credit assessment.

Daniel Dewar said: "As we acquire more data, the accuracy will increase."

In the entire process, the demand for funds comes from musicians or labels, as the actual borrowers. They pay a certain cost (interest rate) to access income in advance, while lenders earn interest by lending funds. In this pilot project, the lenders are holders of the native token MKR of the Maker lending protocol, and PaperChain, as a risk assessor and loan initiator, charges a service fee of about 1%.

Daniel Dewar said: "For example, if a musician gets Spotify income 60 days in advance, and the cost of funds is 8% annually, then we charge 1% from it."

There used to be a saying in the music industry, "I will sing for food." "The people in bands are those who carry instruments worth $5000, drive a $500 car, travel 50 kilometers, and perform for a reward of only $5."

While this is just a glimpse of the offline music scene, it reflects how difficult life can be for music creators, especially independent musicians.

In reality, it is very challenging for independent music creators to make music a profession. It is extremely difficult to make a living solely from music creation.

Music creators are struggling!

Even online, streaming platforms are another important source of income for musicians, and the situation is not optimistic. Not only is the revenue model of streaming platforms questionable, but there are also many problems in the income distribution cycle within the streaming platform.

Daniel Dewar, the founder of PaperChain, believes that due to systemic issues in the entire music industry, when streaming users enjoy instant music and video consumption, musicians' income is delayed for six months.

As the current mainstream music consumption model, streaming platforms such as Spotify, Google, Apple, and others distribute play revenues to creators. As mentioned earlier, play revenue usually takes 3 months to reach labels from platforms like Spotify, and ultimately takes 6 months to reach the musicians.

The process cycle of distributing play revenue by various streaming platforms varies

This means that in the streaming music industry, which has been neglected by traditional financial markets, there is a potential financial market waiting to be explored. In fact, Wall Street capital has entered this field before, but unfortunately, instead of improving musicians' income, they burdened them with interest rates as high as 45%.

In 2014, a startup called Sound Royalties was widely talked about in the music circle. This was a business established by Novation Ventures, a structured fund company under York Capital, claiming to be "musician-friendly" and a "new generation of copyright financing that retains music versions and royalties."

Specifically, the company would offer quick advances to musicians without complex credit checks or the need for musicians to surrender their copyrights, allowing them to obtain an advance fee equivalent to a loan at a rate of 4%.

However, in reality, they would manipulate the loan interest rate to reach 45% through a series of bad terms. Through interviews with industry insiders and information obtained from court documents, Bloomberg learned that the actual interest rate musicians paid was far higher than the claimed 4%.

Typically, the claimed 4% rate was for a one-year advance, but salespeople would strongly persuade musicians to sign longer contracts. Sound Royalties would estimate the artist's future income (e.g., 3-7 years), subtract around 10% as an upfront fee, and require the artist to repay the advance with their copyrights or other income within a specified period, bypassing the artist and Sound Royalties in the settlement process, resulting in musicians potentially paying over 30% interest on the principal.

Legal documents show that record producer, songwriter, and hip-hop artist Sean Garrett received $44,852 from Sound Royalties in August 2018 and needed to repay $74,174 over the next three years.

Daniel Dewar said that long-term contracts could put musicians in a dilemma. While they could receive income in advance, the cost could be eating up 35% or 40% in interest. Not only that, they might also have to license the master use rights. This is clearly a very unfavorable situation for a music creator.

In contrast, in the pilot project conducted in collaboration with Centrifuge mentioned earlier, Paperchain provided a $60,000 advance in Dai Spotify income to an unnamed label at a cost of less than $3 (mainly used to pay Ethereum gas costs). The entire process took less than 30 minutes, and the label's funding cost was 7% annually.

Daniel Dewar said that PaperChain could be seen as a provider of growth capital for the industry, by accelerating the flow of funds in the music streaming supply chain, enabling musicians and labels to receive income immediately. With this income, musicians and labels can use the money for touring, promotion, business growth, and other activities, potentially bringing in additional income for musicians.

From the role that PaperChain currently plays in the newly developed financial markets, it can be said that they are providers of growth capital in the industry.

In addition to achieving timely payments, Daniel Dewar also mentioned, "We provide revenue data generated by streaming platforms, so musicians can directly participate in the market without even needing to sign with labels." This opens up many possibilities for these musicians, such as selling revenue. By combining the sale of revenue with revenue analysis tools, they can receive income in advance, and may even launch a series of financial instruments and products tailored for (independent) musicians.

PaperChain operates in a distributed manner, with team members currently in three countries: Berlin, New York, and India.

As the financial infrastructure of the streaming industry, PaperChain not only represents the most forward-thinking trends in the music industry but is also a blockchain-unrelated real-world use case that combines blockchain technology with actual business, becoming a truly profitable venture. In February 2019, PaperChain was selected as one of the first 10 companies in the accelerator program of Techstars and the global blockchain consulting group Alchemist.

PaperChain currently has two main business models. The first is a subscription-based streaming revenue pricing service based on data analysis, and the second integrates DeFi financing services. As a borrower and operational participant, PaperChain guarantees early access to streaming platform income, such as Spotify, for musicians and labels. PaperChain charges a certain percentage of the issuance fee. The team is exploring other revenue models, including a pricing API Feed that can be used by other companies to build services.

This business strategy is based on the team's keen perception of the urgent need for transformation in the future music industry.

Daniel Dewar told ChainNews that all team members have years of experience in the music industry. Co-founder and CRO Dave Tomaselli launched his independent label in 1998 and worked in consulting for over 20 years at the prestigious Mute Records. Even the CTO has many years of experience in the music industry, with rich industry resources and a deep understanding of music scene trends.

In Daniel Dewar's view, the entire music industry is currently undergoing a transformation towards a musician/creator-centric business model. This means that the relationship between musicians and labels in traditional labels will also change. Musicians are starting to have their own teams, working with agents to operate labels. With the ability to advance income, musicians can control their IP and copyright, and the transaction model of traditional record companies, where musicians sell their IP to record companies in exchange for income, will gradually disappear. The next step for record companies will be to focus on providing services and seeking to add value for musicians.

Coincidentally, when David Bowie issued Bowie Bonds, it was also to redeem his album copyrights. By using the bond funds to buy out his copyrights from his agent at once, he would own all the album rights when the bonds matured.

The target customers of PaperChain are these independent labels and independent musicians, not the large record companies that do not have an urgent need for cash flow.

According to Daniel Dewar, labels as a business must generate revenue, even as low as $10,000 in annual revenue. As long as revenue records can be tracked, this data can be used to advance income.

The main customers of PaperChain are cash flow positive independent labels seeking quick advances for urgent funding needs. Part of the funds is used for cash flow management, while the other part is used to pay musician income. Many labels are interested in the model of "paying musicians every two weeks without disrupting existing cash flow." Additionally, these labels and musicians are in urgent need of funds for music promotion and marketing.

Not limited to the music industry, Daniel Dewar believes that this model can be replicated in other media that generate rich data, such as streaming videos, YouTube, Twitch, games, and applications. As long as there is a large amount of data generated, underwriting and pricing models can be developed, leading to the creation of new financial products.

After a long period of internal testing, PaperChain has just started offering services publicly. Currently, they have partnered with six labels, and discussions are ongoing with several others.

From a data perspective, the company currently tracks over 78,000 songs, with over 13,600 unique musicians tracked, generating a total of 815,000 streaming plays, amounting to $4 million in revenue. This number is continuously growing.

PaperChain business-related data

From their partner platforms, PaperChain's main streaming partners are Apple Music, Google Music, Deezer, Spotify, and others. Due to demand from labels and musicians, PaperChain is actively working on integrating more streaming platforms.

PaperChain itself is not a blockchain company but a fintech company that uses blockchain technology and DeFi protocols to solve real problems. As Daniel Dewar has stated, blockchain is just a tool to solve problems. The key is to solve the problem, not the technology used.

For the blockchain industry to move away from the cryptocurrency frenzy and bubble and enter a phase of tangible applications, companies like PaperChain may be needed.

This article is authorized by ChainNews for reprint. Article source: ChainNews (ID: chainnewscom)

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