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K-Pop Labels and the NFT Token Economy

November 2021 has been a month of flurry and frenzy for the K-Pop industry and its newfound fancy for NFTs.


Within a short span of three weeks, we have seen major labels announce their NFT strategies and alliances one after another.


TLDR

As this is a deeper and more thorough article on the benefits and implications of the (NFT) token economy on the K-Pop industry, we have created quick sections so that you can jump ahead to later sections if so needed.




1. The KPop-NFT Battle Scene

HYBE Labels — November started with HYBE Labels announcing a joint-venture deal with Dunamu, the largest crypto exchange in South Korea.


JYP Entertainment — At around the same time, JYP Entertainment also announced its plans to collaborate with Dunamu on its NFT releases.

SM Entertainment — Barely a week later, SM Entertainment announced plans to form its own NFT division, with the preferred choice of Solana for its blockchain platform.

FNC Entertainment — Without letting up, in the last week of November, FNC Entertainment announced plans to launch its first NFT collection with The Pangea, a blockchain tech startup.



2. The Newly Minted Upbit NFT Beta Service

On November 24th, Dunamu launched its NFT platform, referred to as the Upbit NFT Beta Service.


As seen from the website screenshot above, the two primary means to transact NFTs are using Drops and Marketplace.

Drops function. NFTs will first debut on Drops where users will participate in auctions to bid for the newly minted NFTs. There can be two types of actions, English and Dutch auctions.

In an English auction, the highest bidder will always win, while in a Dutch auction, the bidding starts with the highest price, usually pre-determined by the auctioneer, with progressive lowering of the price until a user bids at that price point.

Marketplace function. The marketplace is for users to trade NFTs which they have purchased at Drops or acquired through promotional NFT giveaway events.

Creator royalties. Whenever an NFT is traded and resold at the Marketplace, a percentage of the transaction fee will be paid to the artist who created the NFT. This creates cycles of additional revenue for K-pop artists, which is previously not possible with the trading of physical collectibles.


Hybe-Dunamu Partnership. This launch comes on the back of the announcement of an equity-based partnership between Hybe and Dunamu. Hybe is, of course, the agency behind award-winning K-pop groups such as the BTS, TXT (Tomorrow x Together), Seventeen and NU'EST and Dunamu is the operator of South Korea's top cryptocurrency exchange Upbit.


Under the equity-based partnership, Hybe will acquire a 2.25% stake in Dunamu for 500 billion won (US$420 million), while Dunamu will buy a 5.57% stake in Hybe for 700 billion won (US$588 million).



3. Why K-Pop Labels Are Getting Ready for NFT Economy

The NFT technology is based on the ERC-721 standard which was introduced in January 2018. In 3 short years, NFT has whipped the world into equal parts financial frenzy and digital art craze.

While the current hype on hyperinflated NFT art can be construed as speculation and "pump-and-dump" scams, the underlying technology is legitimate and tangible if wielded by parties of trust.



3.1 Verifiable Ownership — A Deeper Connection With Fans

An NFT can store unalterable records of ownership to an item and cannot be edited or deleted by any third party unilaterally as it is stored in decentralized blockchains maintained by many.

This allows K-pop fans to purchase limited-edition digital collectible card NFTs and verifiably claim their ownership of the purchased items. K-pop labels believe that fans who have an emotional connection with their idols will be driven to acquire digital collectibles of the idol if the purchase further conveys to them a verifiable sense of ownership.


HYBE Labels has announced plans to release digital photo cards of BTS members as NFT collectibles on the Upbit NFT platform, with variations of media-rich cards imbued with animation and sound.



FNC Entertainment plans to debut its first NFT collection of digital collectibles, called Moment of Artist, which will showcase video content of their artists — the first in line being their male K-pop group SF9. In celebration of their recent comeback, SF9 will be the first to launch their NFT collection which will include behind-the-scene footages of their music video shoot as well as handwritten messages from the band members.


We can expect other K-Pop idols and groups — Blackpink, Twice, Aespa, Stray Kids, ITZY and 2PM — to join the NFT release party pretty soon under their respective labels and NFT platform alliances.



3.2 New Digital Royalty Business Model

Another feature of the NFT is the capability to store smart contracts that can automatically execute upon a certain set of conditions taking place.

The Royalty Model. This brings new and interesting revenue opportunities to K-pop labels. In addition to selling NFTs, K-Pop labels can also benefit from royalties when fans trade their acquired NFTs on secondary marketplaces.


K-pop labels can earn revenue from the launch and first sale of NFTs to fans through auctions (similar to the Drop function of Upbit NFT). When a fan trades the purchased NFT to the another fan in a secondary marketplace (similar to the Marketplace function of Upbit NFT), a percentage of the transaction value is further paid out as royalty back to the labels or the artist associated with the NFT.

As long as the labels have a large, sustained fan base, this royalty model can deliver serious and lucrative income that is not impossible in the business of physical collectibles and certainly not something the business-savvy K-Pop bosses will overlook.



3.3 NFTs as Event Tickets or Special Access Passes

K-Pop labels can use NFT pricing as a way to tier loyalty rewards to fans. Fans who acquire higher-valued NFT content can also be rewarded with special access to meeting with idols in person, certain live performances or even restricted auctions where they are able to bid on exclusive NFT content.


It is also straightforward to verify ticket authentication and ownership with NFT. Because each NFT record stores provenance — a chronological record of ownership of an item, event organizers can easily validate if a ticket is authentic or invalid and at the same time, verify that the holder of the validated NFT ticket is indeed the rightful owner.


NFT tickets can also yield the same financial benefits as NFT collectibles for K-Pop labels. When a fan resells an event pass on the secondary market, a percentage of the transaction fees can also pass on as "royalties" back to the K-Pop labels.

However, this is a fine line to walk, as there is a need to contain unhealthy scalping practices while enabling fans to dispose of their purchased tickets if they are unable to attend the event for legitimate reasons.



3.4 Paving the Future for K-Pop Digital Goods in Metaverses

On the Internet, the ownership of an NFT art piece may be limited to a few individuals but the digital art piece itself may not be considered "scarce" as anyone can download the digital art to their devices and enjoy the art even if they have not purchased the item. This muddies the question of what people are actually buying in an NFT when its copies are readily available for public consumption.


As a closed environment, the metaverse can accentuate the "scarce" quality of an NFT. A digital good in a metaverse cannot be easily copied and consumed outside of the metaverse, unlike a simple image or video animation. Thus, it is in the metaverse where the full potential of an NFT can be realized — where the "scarcity" of a digital good NFT can obey the economics laws of supply and demand.

Furthermore, compared to the proprietary in-world currencies of metaverses, NFTs engender a high level of trust for users as these tokens are stored in public, decentralized blockchains and cannot be altered or deleted by the metaverse platforms.

Already, K-Pop labels are starting to dabble in metaverses and how idol-branded digital assets, such as the clothes of an avatar with an idol's image, can drive virtual economics by leveraging on NFTs.



4. Watch Out — Pitfalls of NFT

However, K-pop labels have to be mindful to build trust with their NFT strategies and offer tangible value, while avoiding the frenzied speculation and rampant fraud that plagued the NFT art market.



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