Several factors aided the rise of Non-Fungible Tokens to stardom. While some died away with the tide of time, many still play an important role in the NFT ecosystem. If you ask many NFT enthusiasts, one of the greatest values of holding an NFT is its monetary benefits. That answer might be the same for creators, but in deeper insight, there is an essential value – NFT Creator royalties.
With NFTs came a way to protect creators’ intellectual property (IP) like never before. But more importantly, it also allowed them to earn royalties on these IPs. Additionally, it allows the creators to earn these royalties perpetually. Exciting, isn’t it? It’s no wonder NFTs broke into many industries easily.
Now, NFT creator royalties are the subject of an ongoing battle. To be or not to be? Good or bad? Remove or keep? It depends on who you ask. It also depends on what platform you decide to explore. Conversations around creators’ royalties shaped the last quarter of 2022 and have spilled into 2023.
In this article, we explore discussions around creators’ royalties and what exactly is going on. Want to find out? You should read to the end.
What are Creator’s royalties?
Creators’ royalties are kickbacks the original creator of an NFT receives on sales made after the primary sale. These royalties are enforced with mechanisms coded into the smart contract of the NFT. Likewise, NFT marketplaces, where the works are also minted and listed, play an important role in whether or not royalties are applied to a sale.
Royalties are usually set at 2-10% of a sale and are perpetual. For many creators, royalties are a way to earn passive income, sometimes even surpassing what they make from primary sales. This situation is more applicable to new artists who do not have a massive following or an active community.
For instance, digital artist XCOPY, early in his career, sold several of his digital pieces for hundreds of dollars. But the pieces accrued value, and many collectors sold them for much more than they paid at primary sales. Due to the royalties attached, XCOPY made more money from these royalties than he did from primary sales.
For context, if an NFT piece is listed for $50,000 with a 1% royalty, the collector would cover the transaction fees and pay $500 in royalties. While that example might seem significant, think of it in terms of trades in the region of a million or more. Furthermore, most of these royalties are paid perpetually, that means if the NFT is sold 100 times, the creator gets royalties all those times, whether the NFT is sold at a loss or profit.
A fight of marketplaces
Royalties are more complex than you might think, in fact, its application in any NFT trade depends on many factors. To activate the royalty kickback, it must have been programmed into the smart contract, but the smart contract can’t distinguish between when an NFT is sold or merely transferred to another wallet, perhaps the collector’s. As a result, the NFT smart contracts depend on third-party platforms – namely NFT marketplaces – to execute royalty payments.
Until 2022, royalties were a constant on most platforms, with most NFT enthusiasts supporting them, however the market began change. Sudoswap was one of the first platforms to oppose creators’ royalties. Unsurprisingly, the peer-to-peer marketplace grew in popularity and had a moderate trade volume. However, other platforms like X2Y2 took a cautious path, allowing collectors to either honor or disregard royalties.
That introduction to the market brought arguments on royalties to the fore again. Much like the conversation on utilities, the question was whether royalties should be charged considering the inconvenience it put collectors in, but on the other hand, marketplaces were honor-bound to protect the interests of the NFT creators.
A representative from the Solana-based marketplace, Magic Eden, said in November 2022 that the move to a royalty-free model was intended to handle “collectors’ need for low-fee NFT trades.” Several other markets followed suit to stay competitive.
That fight spilled into 2023 and grew into a marketplace rivalry between Opensea and Blur. Blur was one of the newcomers, giving more freedom and power to the collectors with reduced transaction fees and a voluntary royalty system. In 2022, Opensea had grown hostile to platforms that make royalties optional and had blocked them from being listed on its platform. According to Opensea, creators’ rights remain paramount and should be protected.
However, Opensea changed its stance as Blur rose as an unexpected rival towards the end of 2022. By February 2023, Opensea had reduced its transaction fee to zero and made royalties optional. According to Opensea, data showed that users were more willing to trade on platforms with reduced transaction fees and optional royalties. It then became a fight over whether to protect the collectors or save its own business. The latter won at the end of the day.
What do NFT Creators think?
The most important question in all of this is what NFT creators think about the changing tides of royalties. The feature that once benefited them is at risk of being eliminated, and as expected, they have been vocal against the sudden rise of optional royalties and the challenges it poses to them.
Deadfellaz co-founder Betty is one of the most vocal on this issue. According to her, the issue of optional royalties was something digital artists expected to happen, and creators needed to prepare for it. Likewise, Dom Hofmann, co-founder of Vine and NFT projects Loot and Blitmap, described the issue of optional royalties as “a boring mechanical debate and an interesting cultural one.”
However, the concern may differ for creators of 1-of-1 NFTs, if any at all. Unlike PFP digital artists, 1-of-1 NFT creators rarely expect royalties from secondary resales. So for them, they could be less concerned about whether royalties apply or not.
What is the future of royalties?
There are numerous sides to the divide, numerous perspectives from which to view it, and numerous interests to safeguard. From the collector’s perspective, royalty is a burden that many would prefer to avoid. Perhaps they were more receptive in the early days of the NFT market, but many now want out. However, it is not just royalties that collectors want removed; transaction costs are also on the list, and marketplaces are quickly adapting to these desires.
NFT marketplaces have tilted towards the side of collectors instead of creators as the varying interests create a conflict of policies. However, the marketplaces remain in a tricky position; impose royalties, and face backlash from the collector’s community, make them optional and face likely exits from creators on their platforms. Not only that, but the marketplaces also have to protect their interests against competing interests. The rise of fierce competitors forced many marketplaces to renege on their long-standing policies.
The fight remains the same for creators, removing royalties has many dire consequences for the artists, collectors, and Web3 community. Without royalties, artists may be forced to release NFTs more often, which could oversaturate the market, drive down value, and make them undesirable to even collectors. Also, creators may be forced to seek out new marketplaces where royalties are allowed and hope the tides rise and fall in their favor.
Many people blame the no or optional royalties on the prolonged downturn, which wiped billions off the market and crippled the NFT ecosystem. With so many losses, collectors began to prioritize profits and trooped to platforms without transaction fees and optional royalties.
As the marketplace-creator-collector war persists, many NFT projects have moved to creator-centric platforms like Manifold. The platform provides code-free minting and has a customizable smart contract model that supports royalties, thus protecting the creator.
Rather than banning royalties, many platforms will make them optional and leave the decision to collectors, leaving the choice to honor or reject royalties a question of morality. Collectors who are after profits would most likely reject them, but those in tune with the ecosystem and its ethos may choose to honor them.
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A blockchain maximalist who believes that technology is necessary for the future we are heading to. An ardent researcher and writer who uses his writings to inform about the prospects in the blockchain space.
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