What is a Smart Contract?
Part 1: Pulling the cord on music’s middle man.
Smart contracts bring together the best parts of business and the best parts of Blockchain. In lieu of a paper contract, which must be executed by a lawyer or official entity, smart contracts can execute themselves via simple programming and verified by the Blockchain.
That’s the TL;DR version, but I recommend reading more. It’s interesting how we got here.
Throughout the history of money, middle men have existed to guarantee the security and efficiency of transactions. A buyer needs to know that a product will meet her expectations. Likewise, the seller needs to know that the buyer’s money is there for him at the moment of transaction. This security requires middle men, such as lawyers, banks, and other regulating bodies. It’s true, often there’s an unwritten contract between the buyer and seller that everything is going to go according to plan, but that comes with increased risk, which many buyers and sellers are not willing to take. You might be willing to use cash to buy vinyl records at a yard sale, but what if you bring the record home and it skips? And what if the cash that the seller accepts from you turns out to be fake?
A smart contract, also known as a self-fulfilling contract, is a piece of code that executes a digital agreement between buyer and seller with more security and efficiency than a traditional transaction, and no middle man required. Ethereum (ETH), the second most traded crypto currency after Bitcoin, is built on smart contracts. If you’ve ever purchased a block of ETH, you’ve used a smart contract. After your purchase, the block of ETH goes into your digital wallet with all of the information about that block — where it came from and every transaction it has been used for to when you acquired it. And that’s just the beginning of what ETH (and smart contracts) can do.
Why does this matter? Just over a year ago, TechCrunch reported that 76% of all cryptocurrencies have been built on top of the Ethereum platform. Unlike Bitcoin, which is fairly stripped down in terms of utility, Ethereum was created to facilitate future development. It has its own open-source code that allows developers to create smart contracts to sell anything from cartoon kitties to classic works of art. If it’s a digital asset, you can trade it using Ethereum, and even— with minimal development — make your own currency for a specific utility.
So when people say that Blockchain is going to disrupt this or that industry, they’re talking about moving centralized functions with inherent complexity and risk to a decentralized system of trust and efficiency. Many systems can be better built on smart contracts. Imagine poker without a casino. Imagine personal loans without a bank notary. At eMusic, we imagine a world where independent artists can grow their careers and flourish amid a new music ecosystem where buying and selling digital music is as profitable as trading cartoon kitties.
The status quo for contracts has not been favorable for the modern artist. Like many industries, Big Music has attracted swarms of middle men. A middle man isn’t always a bad thing: at one point in time, an artist depended on their label to provide rehearsal space, studio time, distribution, and marketing for their product. That was a middle man that worked hard for his bread.
Next, the label would pay a distributor to get the music onto radio, into stores, and onto streaming platforms. Further, with publishers and rights holders, not to mention the scores of platforms a musician must get their tracks into to reach the widest audience, music making has grown increasingly complex and decreasingly profitable. On a typical day in the modern music economy, an artist might interact with lawyers, consultants, businesses, managers, agents, publications, fan communities, licensers, banks, maybe even governments, each one trying to take a piece of their work for as low a price as possible. As the middle men multiply, their voices start to drown out the one voice that really matters: the artist’s.
Label deals were once a rite-of-passage for the independent artist. In light of available platforms and technologies, not every artist wants to pay for unnecessary overhead in exchange for their rights. Some artists who started with labels have opted to break their deals, turning to independent means of distribution and marketing. Other artists have been forced to turn to litigation to remove themselves from exploitative contracts. Those lucky enough to sign contracts in California have the state’s Seven-Year Statute for protection: pop singer Luther Vandross, Metallica, and, more recently, Wiz Kalifa and 30 Seconds to Mars.
Disputes between artists and their contracts are an unfortunate consequence of a music industry focused on shareholder and corporate growth as opposed to fair artist treatment. The huge stars can benefit from this, but what about all the artists underneath, that when signing to a label, risk a much smaller payout and not necessarily any more plays and promotion within their niche? On the day of a new release, Drake can take over the Spotify homepage. Jay Z can start his own music service. This top-down economic model leaves independent artists between punk rock and a hard place: choose to pay the middle-man and get a smaller price-per-stream or go completely rogue and risk less money and fewer streams. At that point, maybe you’d be better off selling your records at a yard sale.
Smart contracts can clean up this mess. Smart contracts have the potential to eradicate all the middle man tomfoolery, doing a lot of the same work as publishers and labels by etching a direct line between the streaming fan and the artist. Everything is above board, transparent, and on the record, leaving the artist free to split payouts between songwriters, managers, producers, or spend the money on marketing and promotion. And as far as utilities go, the possibilities are endless. Artists are endlessly creative when it comes to navigating complex career negotiations, but imagine if they could focus 100% of that creativity on their music. At eMusic, we envision a new music ecosystem built on trust and mutual support between fans and artists. The smart contracts that will allow this community to work will be described in detail in a future Medium article.
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