The Royalties Debate

When collectible NFTs first gained popularity, one of the big draws for the artists and creators was the possibility of earning royalties on future sales of their creations. The onchain nature of these projects allowed for the tracking of sales and the opportunity for the artist to share in the price appreciation of their work. Imagine, people would say, how the Picasso or Monet heirs could have benefited from the sales of their paintings with even a small percentage of the $100MM or higher prices.

Most NFT projects are set up with royalties in the 1–5% range. Popular projects like Bored Ape Yacht Club from Yuga Labs have a 2.5% fee, and another top ten project called Azuki is even higher at 5%. These fees are charged to the sellers on major marketplace sites like OpenSea and MagicEden. OpenSea also charges a 2.5% seller fee for their services. When an item sells for say $100,000, the creator and marketplace fees are deducted from the sales price and only $95K is remitted to the seller. This contrasts with the traditional art market, where a buyer’s premium is added to a purchase price and used to cover the fees. It’s semantics, but these things can matter to the parties involved in a transaction.

However, there is no easy way to enforce royalties outside of agreement from a marketplace. NFTs can be transferred from one wallet to another without a royalty at any time. This is necessary as a holder might want to move from a hot wallet on their computer or phone to a cold storage wallet. A holder might also want to gift an NFT to a friend. On those transfers, the NFT moves for free, and no royalty is required. Holders that don’t want to pay a royalty can process a sale outside of a royalty-enforcing marketplace by transferring an NFT for free and then having the buyer simply send them the Cryptocurrency compensation separately. In that case, the asset “sale” is never recorded, and no royalty is due to the creator.

To be clear, royalties are huge business. In a recent report from Galaxy, a digital asset and blockchain leader, they show that a whopping $1.8Bn in royalties have been paid out all time on Ethereum NFT sales. This massive number makes sense given the huge volume of NFTs traded over the bull run on OpenSea, who enforces royalties on all sales. Galaxy shows that 27% of this royalty bonanza has accrued to the top ten projects, with Yuga Labs picking up nearly $150MM alone. Two other popular projects, Art Blocks and Azuki, have each received over $50MM in royalties. Entire business models for NFT projects and artists have been built on the assumption of these royalties continuing in perpetuity.

New marketplaces have emerged to challenge OpenSea, and they are touting much lower fees to try and build momentum. Sudoswap only charges a 0.5% transaction fee and they do not enforce any royalties. LooksRare had previously paid royalties, but they are now making this optional. If OpenSea follows suit to defend its market share with traders, it would be a huge hit to NFT creators. So far, OpenSea has not made the change. MagicEden has dominated NFT trading for Solana projects, but they are also being challenged by royalty-free options from Yawww and Hadeswap.

Some creators are proactively dropping their royalties to zero to entice new buyers. Popular Solana NFT projects DeGods and y00ts have voluntarily removed their creator fees. Certain NFT projects hold numerous unsold items from their own projects, so they can benefit from increased prices without a royalty. I don’t know if that is the case with DeGods and y00ts, but it is definitely a consideration for others.

Another way that NFT creators can defend their income stream is through the utility they offer to their community. I’ve written in the past about several ways NFT projects have given benefits to their holders. This can include live events, access to the creator team, and much more. We are seeing discussions in the NFT world about creators only providing this utility to holders that bought their NFTs at the original mint or via royalty-protected transactions. Some NFT projects have built their own secondary marketplaces, and they could in theory offer their utility only if buys are made on these. These types of solution can be tracked onchain and could provide a reasonable compromise to protect creators. No major projects have implemented this yet, but I expect we will see this soon.

The royalty debate is in the early stages right now, I’m sure I’ll have more to say in future posts.

Please follow me on Twitter for more frequent updates.

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