As one of the first proponents of NFTs going back to 2015, I’ve always been aware of the importance of royalties. One of the most important things that NFTs have allowed artists to do is make money beyond the primary sale of their creations. Royalties have been one of the biggest — perhaps the biggest — sales pitches for NFTs.
There is a worrying and desperate trend evolving when it comes to marketplaces — removing compulsory royalties. We’ve seen this most recently with Magic Eden, one of the biggest NFT marketplaces out there, moving to ‘optional’ royalties, i.e. tipping.
They claim that this is at the behest of their community, but we all know it’s a desperation play to take on other marketplaces by slashing costs at the expense of all the current and future artists and brands in the space. They’ve literally decided to stop paying artists on a whim — the rest is a whiney excuse. Even so, by supporting this some in the NFT community are in danger of spectacularly shooting themselves in the foot.
Not only does it play fully into the idea that NFTs are only about traders making money, it increases the biggest barriers to entry for new NFT artists and is also one of the things NFT sceptics constantly point to. It also, as I explain later, removes the otherwise aligned incentives between creators and owners which is ultimately self-defeating.
As game developer Petaverse explains, this also risks a dangerous move towards the mobile f2p models that everyone hates and removes a key innovation around NFTs purely for the benefit of traders who have no interest in project, community or creator well-being or sustainability. Those traders could be trading anything — cryptos, stocks, NFTs, and so on. They only care about minimising risk and maximising profit yet are free to trade anything they want.
I have nothing against traders but we must not let them force their views on our sector because they do not care if they damage or even destroy it.
Brands I speak to, and I’ve heard similar from others, see this in a hugely negative light and are asking about enforcement — which they can do by legal means to any known entities. This is already materially affecting conversations and perhaps decisions. If you’re a brand looking at NFTs in a serious way, and trying to project revenue, that becomes a lot more difficult when buyers may or may not pay a secondary marketplace fee.
For background to this conversation, it’s important to realise that we have royalties in the real world too.
Visual artist resale rights exist in the EU, UK, Australia, and much of South and Central America. Artists and performers in other media have long had royalty rights but the nature of the media has made it more difficult for visual artists until NFTs came to prominence. National rules are often somewhat complex, including sliding scales, limits, and time periods but for the most part — these rules are enforceable by law.
The NFT royalty debate reached a new level of vitriol when Tyler Hobbs, acclaimed creator of the Fidenza project (one the most popular NFT art projects out there), decided his new project QQL would enforce NFT royalties via the project’s smart contract. This was in part because minters of the QQL project were actually also given 2% of that specific NFT’s royalties in perpetuity — but I’m sure it was also due to the increasing volumes of marketplaces like X2Y2, who have been optional when it comes to royalties since their inception.
X2Y2 were, of course, dismayed! The hot new project on the block that sold out instantly raising $17m in primary sales, was not tradeable on their marketplace.
X2Y2 believes in a ‘fair’ royalty model — which very coincidentally aligns with their model of profit and turns royalties into tips, which we’ve long known simply does not work. X2Y2 do not care whether royalties are paid or not, they just care that their pockets are lined via trading fees. We live in a capitalist world, and businesses can do as they wish but the dismay at artists doing what they want is incredibly ironic and tone-deaf.
They’re also deliberately misleading people about what decentralization means:
“Decentralization is about giving every participant the option to choose”
— X2Y2
That doesn’t mean choosing to avoid paying fees, whether they be marketplace fees, dao fees, or royalties. In other words, you still have to pay your bills, you just choose which service you use. And creators can choose which services they wish to support, or otherwise.
If artists enforce royalties, that simply means they are not tradeable on marketplaces that don’t enforce them. That doesn’t make them ‘centralised’, it means that marketplaces have to abide by one specific rule if they would like to be a vehicle for resale. Saying this is against ‘Web3’ and ‘Decentralisation’ is an outright lie.
Why should there be secondary royalties at all?
- Artists traditionally struggle to make a sustainable income for many years, if not all of their lives.
- Valued artists’ works tend to rise in value over time but the artist often won’t see that benefit fully (if at all) themselves, even if it’s their previous and current work that is causing the rise in value. Many artists wait decades before their creations are worth anything. A crude example is that Van Gough only produced ~900 paintings. Not only do NFTs allow for an artist to be paid throughout their journey, but it also allows them to maintain quality whilst increasing the quantity of the work and distributing it to a better degree.
- From an ethical point of view, it’s an awkward and selfish view that only buyers or traders should be able to benefit significantly financially and not the actual creative source of the work. Do we really want to reproduce a world where financiers, who are non-productive by design and often sociopathic in actions (i.e. don’t care for or pay for externalities), take all the rewards again?
- The age old question — why is it ok for everyone to make money except the artists themselves? Why is capitalism for everyone else fine, but an artist can’t get rich, should their work become highly valued? The same goes for PFP projects, even BAYC. Companies like Amazon, Google, Apple, Ebay and so on take huge cuts and make enormous profits, but as soon as an individual project or artist makes money, it’s a problem for some. Yet it’s these creators who do the work while the companies are middlemen and the traders care not for the work, only unlimited profits.
Why should we care about NFT Royalties?
Outside of the reasons already given, royalties align incentives within the world of NFTs. Since NFTs can be anything, there’s a lot of nuance within this conversation. There are different types of projects and platforms that make up this ecosystem.
Platforms — Small Mints and Large Mints: One-offs
Royalties reward them as an artist. No expectation of significant future development, this was for the art and perhaps future experimentation, access list rewards, etc. Many generative mints are like this. The utility is the art itself. 99% of people who mint or buy these are absolutely fine with that. They buy the NFT for the art.
Large Mints via Platforms
Art Blocks takes a 2.5% cut of sales as well as whatever the artist may take. This provides a sustainable income for the platform, including ensuring uptime, support, and for future development.
Bypassing the platform cut where it’s running a live service (e.g. live playback of gen art; handling royalty payments to the artist) is a specific example of not paying for a product which is in use.
Large Mints: Long-term projects
From BAYC to Cyberbrokers, there are projects which successfully generate significant revenue from trading.
While an initial sale will cover the original costs, which range from fairly small to very significant, royalties provide a long-term income without having to specifically be charging for new NFTs or services — which we already know communities baulk at.
NFTs allow a business model based on taking a cut of the “traders” whose only motive is profit.
The beneficiaries are marketplaces, the project, and their community. For traders, it simply means they need to be clever with their trades.
If the royalty is removed, traders add no value to a project beyond helping sustain a floor price, but the removal of the royalty also likely increases liquidity at the potential cost of the floor price too (because profit margins change).
Most importantly, removing the royalty removes the incentive to create value in those NFTs. The traders are not paying for the team to develop the product, they’re paying a royalty. The team are incentivised to develop the product in order to earn that royalty but they are not required to.
Everyone has full visibility of all of this and traders can opt not to trade items which have a royalty they dislike. If you tell traders that they throw their arms in the air and moan but it’s a completely selfish view where those people want to have everything and without a care in the world about anyone else, least of all the creators or their communities.
Business models should not change because profiteers want to reduce costs at the expense of everyone else in the ecosystem.
So where are we now?
Traders naturally want to reduce their costs. Despite a few complaints I’ve seen on Twitter, marketplace fees are absolutely minimal (2.5%) compared to Web2 and real-world fees, which usually range between 5–30%.
Those complaining are basically demanding no one can make an uncapped profit, except for them of course — “capitalism is fine if it’s for my benefit.”
That leaves royalties. They’re usually in the 5–10% range, with a tendency to be on the higher end for platform produced work, e.g. Art Blocks, and single or low edition artworks; and lower for PFPstyle projects.
Some platforms now have no or optional royalties. The problem here is one of human nature — “why pay 5–10% when I don’t have to?” Let’s be absolutely clear — no one can be blamed for not paying them.
Opt-in royalties are a complete waste of time. Opt-out royalties may have a slightly higher take up but it’s like having an option for a free discount — who isn’t going to take it?
Put simply — tipping doesn’t work and it especially doesn’t work when not an in-person interaction with human beings..
One thing to note is that person-to-person sales which are not on a marketplace/auction house are not expected to be subject to royalties even in countries supporting resale rights, although it’s always optional of course.
Private deals will always happen and there are far fewer complaints about artists from this, a few high end deals apart.
What about rugs or poor performance?
One complaint I’ve heard is that some projects charge royalties but do a poor job of further development.
This may be true, especially in the case of rugs, but that’s a case of buyer beware. Besides, those traders calling for no royalties have no interest in the project itself anyway.
The royalty here is still justified to them as creators even if they let the project stagnate.
The 1%
From social media, it always seems to be people complaining about their top tier project having a royalty but by trying to remove them from that very top tier you also kill the 99% — everyone else who isn’t making a good profit and for whom royalties may be vital or useful aspects of their income — as it is to many artists and developers.
The issue seems to be that some traders are not making a profit and companies like YUGA generate revenue from each trade. If a trader can’t make a profit, the issue is with the trader or market and the answer is not to trade. No one forces anyone to trade and all costs are disclosed up front.
What could creators do?
All that said… two examples of things that could be done:
- Adjust the royalty level based on floor price to reduce trader risk at the high end.
- One off days with lower or zero royalties to incentivise trading, although this risks market distortion.
Both of the above would need full disclosure for a long period ahead of time.
Other Solutions
Technical
It’s likely impossible to make royalties mandatory at a technical level without changing NFT transfers from permissionless to permissioned or new ecosystem-wide NFT standards (and even then…). However, there are other options:
- Ban accounts (and close associates) which use certain marketplaces from future primary sales, access lists and airdrops. This is difficult of course because people have multiple wallets and smart users will note associate those wallets with eachother.
- Ban contracts from certain marketplaces from having the permissions they require to do sales. This can be circumvented at a cost (token wrapping), but that cost will often be far less than the royalty).
- Legal action against marketplaces not enforcing artist T&Cs or national resale rules.
- Creators could ensure their metadata remains off-chain, and block the art if royalties aren’t paid. This metadata could be reinstated if another buyer pays royalties. Again, this in itself is probably more of a concern to the ‘decentralisation’ and ‘permissionless’ nature of crypto — but sometimes you have to fight fire with fire.
- Ban those who don’t pay royalties from the utility of a project
Social
- Pressure on marketplaces to enforce royalties.
- Pressure on owners to understand the purpose of and to pay royalties.
Legal
- Artists can attach T&Cs to their work. I’m subject to such royalty as the owner of an artwork from renowned artist Kevin McCoy.
This has always been the way…
People will always complain about costs because they only see their role in it. If you are not an artist, developer, or business owner, you have a natural assumption about how easy and profitable it is. And you’re almost always completely wrong.
If you think 2.5% marketplace or 5% royalty fees are too high then go ahead and try and run a business or be a creator. Do the maths and for all but the very largest volumes, you’ll be out of business/needing a real job within 12 months.
I worked on an award-winning game, Eufloria , which was £2.99/4.99 on the App Store. It was years of work by 4 people at various points and entirely self-funded in a sector where almost all products generate little or no revenue. Despite the awards and hours of gameplay, and the fact it cost less than people pay for a Starbucks coffee, people still moaned about the price.
The fact is that some people will always moan and consider themselves the most important part of a market. There’s even crazy rhetoric emerging that without buyers there’d be no market so they’re the most important thing and we should cave to their demands.
That is, as pointed out on social media, ludicrous.
Balance is the most important thing — it’s basic economic price curves. And royalties are no different.
What’s happening now is as crypto is in a bear market we have some traders with significant losses making noises instead of reconsidering their trading abilities. We should be understanding of losses but we should not be allowing them to dictate the terms because they’re here today and gone tomorrow.
For creators, it’s our very living they want to take away.
Sillytuna is developing Soulcast and Clodhoppers.
