I cover enterprise adoption of blockchain and cryptocurrency.
Now that Warner Music Group has mastered streaming, generating $2 billion in revenue from the technology, the music giant behind Cardi B, Ed Sheeran and Bruno Mars has set its sights on blockchain, joining an $11.2 million investment in Dapper Labs, best known for making the viral blockchain game, CryptoKitties.
In December 2017, CryptoKitties, which lets users combine (breed, as they call it) unique digital representations of kittens and trade them, almost broke ethereum when it single-handedly caused transactions on the public ethereum blockchain to explode overnight. According to Warner Music senior vice president of business development Jeff Bronikowski, the CryptoKitties technology, which is similar to bitcoin but for other digital assets, could be adapted to create unique, tradable merchandise featuring its roster of superstar talent if the transaction volume issues can be solved.
So, as part of the investment from Andreessen Horowitz, Digital Currency Group, Union Square Ventures, Venrock and others, Bronikowski says Warner Music's blockchain team will work with Dapper Labs to create digital assets using a new public blockchain revealed today, called Flow, that is capable of handling transaction volumes many times more than ethereum, even while expanding on a number of other blockchain projects.
At stake is more than just the success of Dapper Labs itself, but the pole position in a rapidly escalating competition to build economies that blur the line between digital assets and the real world, and the virtual world and real assets. "The main goal is to create new avenues where the fans of our artists can explore their fandom," says Bronikowski, who oversees Warner Music's innovation group, "and engage with the artists in new and different ways that they haven't done before."
In exchange for this first round of fundraising, to be spent exclusively on finishing the Flow blockchain and building apps on it, the accredited investors will receive a traditional cut of company stock, but with an additional option to convert the securities into tokens that can be spent on the network after the company receives approval from the Securities and Exchange Commission (SEC). Existing investors Chris Dixon of Andreessen Horowitz, Fred Wilson of Union Square Ventures, and David Pakman of Venrock are already on Dapper's board, and no other seats are being created as part of the investment.
While Warner's Boost seed investment fund contributed less than $1 million in the convertible security, the media giant's presence is notable for the size of the audience at its disposal. Last year the company generated $4 billion revenue following on the back of partnerships negotiated by Bronikowski with both Facebook and Instagram, letting the social media giants use music and images from Warner artists. Dapper is Warner Music's first blockchain investment.
Warner's partnership with Dapper started in May when the music giant's global digital business manager, Tiago Correia, met with the Dapper team at the Next Web Conference in Amsterdam and struck up a conversation about how blockchain could be used to directly connect the music giant's roster of artists with their fans in the digital world. For example, the video game Fortnite recently approached 250 million inhabitants of its virtual world, and research firm eMarketer estimates that 57 million Americans will visit similar virtual reality worlds every month by 2021. By using Dapper Lab's new Flow blockchain to prove that a unique digital object (also known as a non-fungible token) such a digital album art signed by the real Cardi B, is real, those objects will be able to accrue real value.
"When I was in college, you'd walk into someone's room and you'd see 200 CDs and you would say, 'That guy's a big music fan.' And now you just see somebody with a music subscription service and some playlists," says Bronikowski. "We think that as people spend more time crafting their persona in the digital realm, digital goods and collectibles is a great way to express that fandom."
In addition to Warner's work with non-fungible tokens, the media company is looking into how cryptocurrency could be used to let fans tip its favorite artists, and testing two different blockchain platforms for directly connecting musicians with their fans without the need of intermediary distributors. New York-based Dot Blockchain Media links audio files and visual artwork together into a virtual album that can be transferred to a new owner along with proof of ownership. London-based Jaak is building a platform for the entire music industry to track metadata about who owns the rights to a song, how they can use it, and when it was purchased.
But for Dapper Labs, based in Vancouver, Canada, the potential benefits of using a blockchain are much bigger than music. The company started in February 2018 as a way to demonstrate how non-fungible tokens can enable a new world of blockchain applications. While bitcoin rose to popularity by enabling exchanges of fungible tokens, meaning each unit is identical, non-fungible tokens can be coded to represent a wide range of assets.
In May 2018 a CryptoKitty named "Celestial Cyber Dimension" sold at auction for $140,000. The average CryptoKitty sells for much less, at about $2.05, and in total conducts weekly volume of about $12,500, according to markets data site, NonFungible.com. While the total market cap for cryptocurrencies is about $260 billion, according to CoinMarketCap.com, the total market cap for non-fungible tokens is estimated at only $101 million, led by ethereum-based Decentraland, which makes up the lion share of the value with an $85 million market cap, followed by CryptoKitties at a distant second with $5.3 million, according to NonFungible.com.
"Non-fungible tokens will become the underpinnings for provenance of several real-world assets," says NonFungible.com president Daniel Kelly. "For example, artwork copyright, the deed to your home, the certificate of authenticity for your wedding rings, or your university diploma, would all be prime candidates of non-fungible tokenization."
Dapper Labs started as a project within Axiom Zen, a blockchain startup incubator. After the company's flagship product, CryptoKitties, exploded onto the ethereum scene in 2017, quickly becoming the most used decentralized application (an application run directly on a blockchain, called a dapp), the company spun off on its own and has raised a total of $39 million from Forbes Blockchain 50 members Google and Samsung, along with Andreessen Horowitz, Union Square Ventures and others.
The $11.2 million investment announced today will be used to complete and deploy Flow, a public blockchain similar to ethereum, meaning anyone will be able to build on it, and a token will be necessary to use it. In addition to the use cases being explored by Warner Music, Dapper Labs today announced partnerships with Ubisoft, the developer of Assassin's Creed and Animoca Brands, developing a racing game where unique cars can be bought, sold, traded and raced. The Flow blockchain will also be used in a previously announced partnership with the National Basketball Association (NBA) to let sports fans trade memorabilia.
"Imagine on flow, the possibility of a platform for billions of sports fans to trade verified, authentic and limited edition digital memorabilia in real time around the world," says Dapper CEO Roham Gharegozlou, 33, a Stanford grad turned angel investor, who is also co-founder of the company.
As with bitcoin and ethereum, Flow transactions will settle in blocks. But unlike bitcoin, which settles about every ten minutes, and ethereum, which settles about every 20 seconds, Flow is expected to settle in ten seconds. While CryptoKitties usage has dropped dramatically since the glory days of 2017, when 13,600 users a day played the game, according to dappradar.com, Gharegozlou says it was the poor user experience of taking days for a transaction to settle that drove away players. To combat that, an internal Flow prototype currently running performs about 1,000 transactions per second, he says, and is expected to scale to 10,000 transactions per second by the time it launches in 2020. To reach those speeds, each node on the Flow blockchain is powered by a consensus algorithm derived from Blockchain 50 member VMware's HotStuff, the same algorithm used by Facebook in its early work on the libra cryptocurrency. Instead of every node performing each task of reaching consensus on the network, four different types of nodes will be used.
Details about how the new flow cryptocurrency will be dispersed to future users are being kept behind tight lips. Options include the power-intensive process of mining, like bitcoin and its more transaction friendly cousin, litecoin; through airdrops where users are gifted an asset, like Stellar is doing with the XLM cryptocurrency; or like Facebook's libra, pegged to more stable assets to make it less attractive as an investment, but more useful as a means of exchange. Given concerns that the SEC may someday find that some cryptocurrencies look more like securities in the underlying technology than money to be spent, striking the right balance between these options could give Dapper Labs an advantage in the rising tide of technologies designed to incentivize people to actually spend cryptocurrency.
"For now, the only people we're releasing any of these details to are accredited investors under securities law exemptions," says Gharegozlou. "The most important thing is that the token itself, once it becomes available, doesn't become tainted in any way." After all, if Warner Music, Ubisoft or the NBA is ever actually going to let die-hard fans use the cryptocurrency, it can't also be a security. "Just like ethereum, you will need a token to pay for smart contracts, and we want to build the kind of network that's built for usage, rather than speculation."