Blockstar Research Report: Audius
Research and analysis on the leading protocol for decentralized music streaming
Contents
Project Overview
Audius Protocol Outline
Industry Overview
Team & Vision
$AUDIO Tokenomics
Competition & Risks
Evaluation & Recommendation
**Be sure to check crypto-specific language for hyperlinks to learn more**
Project Overview
Audius Protocol is a decentralized music sharing platform aimed at solving the revenue-sharing inefficiencies present in the current state of the music industry. Community owned and artist driven, the decentralized platform allows for musicians to publish their work without the need for a central intermediary. In essence, the protocol offers a blockchain alternative for musicians to create and monetize their work by distributing content directly to fans.
Audius was founded in 2018 by Roneil Rumburg and Forrest Browning in an effort to disrupt the music industry. Rumburg and Browning recognized the unequal distribution of revenue sharing in the music industry as compared to other similar entertainment industries. For example, in 2017, the music industry generated $43 billion in revenues, however only 12% of that went to content artists. In comparison, NFL and NBA players capture 47% and 50%, respectively, of the revenue generated by their leagues. The decentralized nature of Audius sets out to remove intermediaries and provide artists a platform to sell their music directly to their fans.
The project was initially built on an Ethereum sidechain (POA Network), but has since moved parts of its services to Solana. Audius’ developers focused on integrating the protocol with IPFS to store and share the music content while also building Hedgehog, a decentralized application that makes the user interface extremely easy to navigate.
The Audius Protocol is powered by the $AUDIO token which is primarily used for security, feature access, and governance. At the time of this writing, 273 million $AUDIO are staked, over 75 million songs have been streamed, and the platform has over 5 million unique users.
Audius Protocol Outline
Users
Audius has three main user demographics: artists, fans, and service providers. Artists upload music, create albums, and share their content with their following. Fans can stream music, create playlists, subscribe to and follow their favorite artists, and share content with their social following. Service providers serve app traffic, stream songs, and help secure the network.
Service providers are core to the protocol as their participation is key to the maintenance of the ecosystem. Service providers maintain the network by staking $AUDIO and running nodes. These nodes can consist of one or both of the following: (1) Content nodes, and (2) Discovery nodes.
Services
The Audius protocol provides the following services to users on its network: (1) A seamless decentralized streaming experience through the Hedgehog wallet browser, (2) Content nodes for storing, maintaining, and accessing the content, (3) Content Ledgers, and (4) Discovery nodes that allow users to query data and share content.
Hedgehog (Identity Service)
Hedgehog is a decentralized application (dApp) that is core to the Audius project and offers a look into the future advancements of blockchain technologies. One of the highest barriers to entry into crypto for the general population is the complexities of blockchain transactions. Creating and maintaining a wallet, signing and verifying transactions, and understanding wallet interactions with the blockchain often lead casual investors to shy away from crypto. In the case of Audius, the developers saw this as a potential deterrent for their listeners. They believed that if a client had to confirm a transaction in their MetaMask wallet each time they wanted to listen to a song, customer conversion from SoundCloud or Spotify to Audius would be fairly difficult.
As a result, the Audius development team introduced Hedgehog, an open-source, client-side Ethereum wallet that allows users to interact with decentralized applications (Audius) just like they would any other website. Hedgehog is an alternative to MetaMask wallets and offers a more seamless transaction on the blockchain by managing users’ private keys and wallets. When a user browses through Hedgehog, the confirmation of transactions occurs in the background, making it seem more frictionless than traditional Web3 transactions.
Hedgehog was created for Audius, but can be used with many other dApps. It was built for transactions involving low-to-no financial value. According to the dev team, some of the best use cases for Hedgehog include: signing data, gaming dApps, and of course, decentralized music players. More data on the development of Hedgehog can be found here: https://docs.audius.org/developers/hedgehog
Content Nodes
Content nodes, or creator nodes, are services that store and maintain the data collected and shared on the Audius network. This data includes user, track, and playlist metadata, images and artwork, and audio content. Content nodes are run by operators who stake $AUDIO, which allows them to participate in the network. In return, they are rewarded with $AUDIO tokens through ongoing issuance and aggregate fee pools.
As part of the distribution network, Audius developed AudSP, the Audius-native extension to Inter-planetary File Sharing (IPFS). IPFS is a distributed and decentralized network for storing, accessing and sharing files, websites, applications, and data and can be read more into here: https://coinmarketcap.com/alexandria/article/what-is-ipfs
In order to provide democratic participation and accessibility for all users, the content shared on the Audius protocol must be highly available, independently verifiable, and decentralized. AudSP is a decentralized storage solution built on IPFS that aims to provide the services necessary to maintain the Audius network. On the back end, artists register new content that is provided to the content ledger and the content nodes through Audius’ upload flow. For a track to be distributed to the Audius network, the artist must agree to making the content available to the broader network (via content nodes).
To this end, content nodes provide the network proper communication between the content ledgers and fan clients via AudSP.
Content Ledger
According to the Audius whitepaper, the Audius content ledger is “an amalgamation of smart contracts on Ethereum, POA Network, and other future L1 or L2 blockchain networks that host pieces of the Audius ecosystem.” The content ledger for the Audius protocol includes: (1) consistent audio content and metadata, (2) a decentralized process for artists to control track content, revenue splits, and ownership structure, (3) a registry for all nodes in the Audius network, (4) data for all network interactions with Audius, and (5) implementations of the token and governance system for Audius
Once the artists communicate with the content nodes to generate upload artifacts for their music and art, artists can then add to the content ledger via the next step of the upload process. After the data is codified through the content nodes and stored in the content ledger, it can then be indexed by the discovery nodes.
Discovery Nodes
Discovery nodes enable fans to find music on the network. Service providers in the network can stake $AUDIO and register a discovery node with the Audius network. Fans then interact with the service provider’s discovery node, which queries metadata to find the appropriate content, rewarding the provider with $AUDIO tokens similar to content node providers. Discovery nodes are listed on the content ledger’s node registry, allowing fans to select nodes to query data from. Discovery nodes enable clients to retrieve a fan’s feed, a playlist, song and artist metadata, search Audius entities, and execute other queries on the network.
In summary, service providers stake $AUDIO to participate in the network through content and discovery nodes, which communicate with the content ledger, and eventually with artists and fans to provide a decentralized network of content creation and content sharing.
Governance
Governance is a key aspect of any decentralized protocol because of the lack of central intermediaries. In decentralized economies like Audius, the key users and stakeholders have the ability to control the decisions regarding protocol rules, changes, and upgrades. Audius tokens staked on the network equal a 1:1 vote on a governing basis. Important items that users and participants staking $AUDIO include, but are not limited to: feature integrations, royalty rates, token distribution, fee pool allocation, and staking rewards. Audius governance protocols enable true decentralization by giving the power of the protocol to its users. Audius’ governance goals aim to create a truly decentralized economy that provides governance to the most value-added actors, as well as subsequent incentives to those who are most active and integral to the network as a whole.
Fee and Revenue Generation
Users of the Audius protocol are rewarded for their participation through two main revenue channels: (1) the ongoing issuance of $AUDIO and (2) fees generated from token asset pools.
The ongoing issuance of $AUDIO contributes to a 7% inflation per year issued on a weekly basis. These new tokens issued go to the most active nodes and artists, rewarding positive participation with the network. In addition, artists who have a top 5 weekly song will receive 100 $AUDIO, a top 5 weekly playlist will receive 100 $AUDIO, and a top 10 monthly API app will receive 500 $AUDIO. These tokens can be swapped on decentralized exchanges where liquidity providers will earn the fees on $AUDIO. Fans can also tip artists directly in $AUDIO. Later in this report we will explore the value, or lack thereof, of $AUDIO tokens.
Industry Overview
The Centralized Music Industry
The centralized music industry is dominated by top players including: Spotify, Apple Music, Amazon Music, Youtube, and SoundCloud. Since inception in 2012, streaming revenues have grown at an average rate of roughly 44% annually, becoming the primary source of revenue for music labels and artists.
As of 2020, Spotify lead the streaming service group with 182 million subscribers, nearly double the amount of subscribers for Apple Music. The industry as a whole generated $75.5 million in revenues in the US alone, with only 12% of that going to artists, according to Rolling Stone.
The Decentralized Music Industry
Projecting revenues for an industry as young as the decentralized music industry is fairly difficult, especially when considering the revenues are generated from completely different channels than centralized music. However, by taking a look at the overall music industry and the demand for music, we can begin to look at the potential for an ecosystem that pays royalties directly to its content creators, as opposed to central intermediaries first.
Audius protocol dashboard providing the key analytics can be seen on the dashboard here:
https://dashboard.audius.org/#/
The analytics for the dashboard above provide a picture of the state of the network and the amount of activity on it. The greater the activity, the more demand there will be to hold $AUDIO to participate in the network. Service providers and artists then are rewarded in $AUDIO based on the amount of activity they drive to the network, creating a payout structure proportional to the value-added by key actors. The model is intended to provide artists with 90% of the fees generated from their music, as opposed to the 12% in the centralized industry.
Team & Vision
Team, Investors, Partnerships
Audius was founded in 2018 by Roneil Rumburg and Forrest Browning. Rumburg most recently co-founded Kleiner Perkins, an early stage seed fund, and previously co-founded a Bitcoin peer-to-peer payment company called Blackslash. Browning was formerly co-founder of StacksWare, an enterprise data management platform that was acquired in 2017. Both Stanford graduates with expertise in crypto and data management, the two founders have built a strong team of highly experienced engineers and crypto enthusiasts.
To date, Audius has conducted three rounds of funding amounting to about $13.6M. Some of the most prominent companies in crypto including Binance, Coinbase Ventures, and Lightspeed, have invested in the project. Additionally, Audius has raised funds from popular musicians such as Jason Derulo, Steve Aoiki, and Katy Perry in their most recent round of fundraising.
In August of 2021, Audius landed a partnership with social media giant Tik-tok to enable tik-tok users to upload music from Audius. This partnership, in addition to the partnerships with high-profile artists, set the framework for the continued mission to bring decentralized music to the masses and help artists capitalize on their work.
Roadmap and Scalability
At a high level, most of the roadmap for Audius has already been completed. The Audius team has successfully developed a working product that allows musicians to upload music to nodes hosted by community members and enjoyed by fans. The token incentives are functional and there is a small but consistent community of users. The only remaining feature to be added to the protocol that was stated in the whitepaper is the introduction of stablecoin operability. This would allow users to tip or pay for certain privileges within the dApp using a popular stablecoin like USDC.
At this juncture, there are no additional roadmap plans for Audius. As a project that is truly governed by the community, the future of the protocol lies in the hands of its users. Through the governance process, the community can add new features, direct token emissions, or propose any other changes to the protocol moving forward. For example, in June the protocol voted to award 267,000 AUDIO to Gemini Labs to support their product that helps creators from other platforms easily onboard their tracks onto the Audius platform. Additionally, the product “YouTube to Audius” could potentially open the door to thousands of artists who normally upload their music to YouTube.
Given the significantly reduced costs of storing the music data on IPFS, scaling the protocol from a data storage standpoint should not be a challenge. The main issue Audius faces with scalability is attracting new users. In such a competitive market that is dominated by Web2 companies, the greatest hurdle for Audius remains providing enough value to users to get them to change their music streaming habits.
Tokenomics Analysis
Token Utility and Tokenomics
With a general idea of what Audius is and how it plans to change the music industry, we can turn our focus to the tokenomics of the protocol. Audius launched their $AUDIO token on the Ethereum blockchain with an initial circulating supply of 1,000,000,000 $AUDIO. Each year the supply of $AUDIO increases by 7% (6% of this inflation directed to node operators and the remaining 1% towards the rewards system). A graphic of the token distribution between the community, investors, team, and foundation can be seen below.
The utility of the $AUDIO token is threefold. The token can be used to support the security of the protocol, governance, and access to different features within the dapp. As mentioned earlier in this report, Audius operates using two different types of nodes: discovery nodes and content nodes. These nodes allow for the indexing of metadata and storage of different content types like audio content, artwork etc. This dual-node system is crucial to the success of Audius and as a result, users are heavily incentivized to participate. At current prices, the 6% ongoing issuance rewards distributed to node providers would come out to just over $21M. To participate as a node, users must actively bond a minimum of 200,000 AUDIO tokens, raising concerns of feasibility for the average person. Given that the minimum amount of money someone needs to run a node is $68,000 (based on $AUDIO prices as of August 2022), the barrier to entry is incredibly high.
The next feature of utility for the $AUDIO token is for governance. One of the key differentiators of Audius, and any Web3 project, is the role the community plays in the future of the project. The process for making updates to the Audius protocol is as follows:
A proposal is introduced to the Discord community for feedback
Following feedback from the community, the proposal is posted on the Audius Forum
Next the proposal can be submitted to the governance portal
Node operators can then vote yes or no to a proposal
If the proposal passes it is then executed
All proposals are subject to 5% of staked $AUDIO quorum and 50% majority vote. This means that for a proposal to pass at the very least 5% of all staked $AUDIO must vote and over 50% of those votes must be a vote “For” the proposal. Given the top 3 nodes have 141M, 39M, and 37M staked $AUDIO respectively, there is a lot of concentrated governing power.
The final feature of utility to the $AUDIO token is the use of the token to provide access to different features in the dApp. Users can tip their favorite artists, purchase different account levels, access locked content from their favorite artists, or stake their tokens with an existing node operator to earn some of the ongoing token issuance. It is important to note that at present, there are no fees for a user to listen to music nor are there fees for an artist to upload their music. Additionally, although it is not necessarily a utility of the token but more so an incentive, there are 1% yearly token rewards given to active members of the community. Users can earn small rewards for uploading tracks, inviting friends to the app, or liking different songs.
Competition & Risks
Competition
At the time of this writing, the competition for Audius is primarily Web2 companies as they have the majority share of active music streamers. Spotify boasts over 422 million users who use the app at least once a month, Soundcloud has over 175 million monthly active users and Apple Music has over 88 million monthly active users. These are all multiples larger than the active users on Audius of 2.4 million, or any Web3 music protocol. With these Web2 streaming platforms, revenues are generally made through advertisements or subscription fees, both of which are not currently found on Audius. Moving forward, the protocol can vote to implement either method to increase monetization but currently relies on token emissions to provide monetary value to ecosystem participants.
Risks
Like any other digital asset investment, the Audius protocol does not come without risks. The first risk is the smart contract risk that is inherent with any Web3 protocol, and unfortunately for Audius this is a very real risk. In July of 2022, the protocol was hacked for $6M of $AUDIO through a governance exploit. The attacker was able to pass a malicious proposal that transferred funds directly from the treasury to be dumped. Although this exploit did not greatly affect the price of the token nor the holdings of individuals, it highlights the very real risk of a protocol failure. Because Audius needs to offer a product that is better than its Web2 counterparts in order to attract new users, a large exploit can be a great deterrent.
Another risk to consider with the Audius protocol is the centralization of the nodes. The future of the protocol depends on the direction the community leads it through various governance proposals. Currently, only nodes can make proposals (minimum of 200,000 staked AUDIO) which already puts the power in the hands of a select few. To put this into perspective, Gemini Labs was able to pass a proposal with just 10% of the staked $AUDIO voting (only 5% is needed to pass a proposal). Without full participation from the community, issues of concentrated governance power compounds.
The final risk concerns longevity and continued use of the protocol. The number of active users peaked in October of 2021 at around 5M users and as of August 2022 is around half that amount. This is still a very strong number considering even the most popular DEX, Uniswap, has under 500k monthly active users as of August 2022.
While the active user count is strong, there remain glaring issues when looking further into the protocol analytics. For example, in July of 2022 there were only 5.5M music plays from Audius’ 2.5M users. This equates to roughly 2 music plays per user per month. In contrast, traditional music streaming platforms like Spotify see roughly 13 plays per user per day. Arguments surrounding the current size of the content catalog and development state of the protocol are certainly valid, however all accessible data must be considered when evaluating risks.
Evaluation & Recommendations
Blockstar’s Tokenomics Analysis
As stated earlier, at the time of this writing the $AUDIO token has just three true prongs of functionality within the Audius ecosystem: (1) Feature access, (2) Security, and (3) Governance. $AUDIO tokens are staked as collateral for value-added services and service providers are rewarded through on-going issuance. This on-going issuance inflates the token supply by 7% annually. Any $AUDIO staked is also assigned governance weight, allowing stakers to vote on protocol proposals.
Valuation Analysis
The only prong of functionality we see as holding any true value is the feature access functionality. However, in its current state, we do not believe that there is enough demand for the product to put any appropriate value on the token. Should the protocol continue to develop and artists begin exclusively streaming on the Audius protocol, the prospect of exclusive feature access via the $AUDIO token is an attractive one from a value perspective.
Project Recommendations
The following are examples of proposals we would like to see implemented to add value to the project. Both proposals are contingent on the assumption that the Audius user base continues to grow and more artists begin exclusively streaming on the protocol.
Like Spotify, who dominates the streaming market and maintains exclusive artist publishing rights, we would recommend that Audius implement a similar subscription based fee structure. In this concept, users would have to pay in $AUDIO to access the platform. Tokens would then be placed in an escrow wallet controlled by smart contracts. At the end of each business cycle, artists would get paid out in $AUDIO based on an amount proportionate to the streams they received.
Advertisements on the app could be another way for the platform to create direct value for the token. In order for advertisers to promote their brand on the platform, they too would have to pay exclusively in $AUDIO, giving the token more value in terms of dollars.
At its current state, Audius does not have enough users to make either proposal a valid one, and therefore we understand why they are not being done. The first step is to increase brand awareness and grow the user base, allowing for proposals like ours to have merit.
Blockstar Recommendation
Blockstar exclusively recommends investment in tokens that have demonstrable value. Investments in tokens like $AUDIO are purely speculative and while there is certainly excitement around the value propositions that Audius promotes, at present we do not believe there is any value. Only add to your portfolio as a small percentage speculative investment if you so choose.
BLOCKSTAR RECOMMENDATION: PASS
Sources:
https://docs.ipfs.tech/
https://bitnewsbot.com/what-is-audius/#3-how-do-you-make-money-on-audi-u-s-how-do-artists-get-paid-