There’s been a sudden, widespread proliferation of non-fungible tokens (NFTs) in the music industry in February and March of 2021, so here’s a short guide to explain how they work.

NFTs are a way to sell a unique piece of music (or a painting, photo, graphic, collage, video, piece of writing, or anything else, it seems), exclusively to one person, or one small set of people, via a non-fungible token –  which is intrinsically linked to the original work. In essence, the buyer is purchases ownership of a data file that contains the music (or other work of art) in a unique transaction. The back end is controlled by blockchain technology – a kind of digital ledger that can record transactions between two parties efficiently, verifiably, and permanently.

The only way to buy NFTs now is with a cryptocurrency called Ethereum. Once the artist approves the sale, the Ethereum token is deposited in their digital “wallet,” and can then be transferred into their bank account, and withdrawn as actual money. The combination of blockchain technology and cryptocurrency makes buying an NFT very secure. Once the buyer, or small group of buyers (usually fans of the artist), has purchased the item, the only way for anybody else to obtain it is if a buyer re-sells.

There’s usually still a “middleperson” with NFTs, as the artist sells to the fan through a company, which usually takes a percentage for facilitating the transaction, and a fee for the energy required to create the token. But there can also be less need in the transaction for other typical music industry professionals; record companies, streaming services, digital service providers, agents, managers, publicists, promoters, venues, and so on, might all be left out.

There’s a lot of money to be made with NFTs. Often, the sale is done by auction, which drives up the price for in-demand recording artists. One globally popular Canadian musician auctioned off a video-art piece with a song demo for about $490,000 CAD. Kings of Leon made more than $2.5 million CAD in NFT sales of various exclusive versions of, spin-offs from, and merch for, their current album When You See Yourself. It’s not unlike crowd-funding or Patreon perks, with different products offered by artists to their fans at different prices, or levels of funding; but with NFTs, the sale is only to one fan, or very small, exclusive groups of fans, either once, or in very limited-edition numbers.

And the money can be made multiple times. Because the artists set the terms of the sale, they can dictate the percentage they receive of all future sales of the product, no matter how many times it’s re-sold. So, for example. If whoever bought that Canadian musician’s video-art piece for $490,000 CAD re-sells it for, say, $800,000 CAD, and the musician has established, say, a 20 percent share of future sales, they’ll receive another $160,000 CAD when it’s re-sold. And it might be re-sold many times.

But, according to the eternal laws of supply and demand, in order to drive up the price of the NFTs via auction, or set a high initial price for them, the demand already has to be there. So if a musician draws hundreds of fans rather than hundreds of thousands, or casual listeners rather than hardcore fanatics, they might not make more money from NFTs than from crowd-funding or Patreon offers.

The major, current  drawback to NFTs is that the energy used – referred to as “mining” – for Ethereum is bad for the climate. From Time magazine, March 18, 2021: “Critics say the mining that makes NFTs possible is perhaps humanity’s most direct way of making money by polluting the planet – Ethereum mining consumes about 26.5 terawatt-hours of electricity a year, nearly as much as the entire country of Ireland and its almost five million residents.” But that may improve over time with new advances in technology, so the problem might eventually be solved.

Currently, the buzz around NFTs seems driven more by their money-making potential than their intrinsic musical value. Some say they’re the future of the music industry, some say they’re a fad. Only time will tell for sure.