NFT Marketplaces are Going Royalty Free. So What’s Next?
by corporate trash
11/2/2022
Once seen as one of the most important features of NFTs, NFT royalties have become a hotly contested topic in the space, as marketplaces, collectors, and artists alike search for sustainable business models. As prominent collections and marketplaces switch to remove royalties to gain market share, many argue that it is a “race to the bottom.”
Artists who depend on the royalties from their work to make a living and grow their community are concerned. Projects that have relied on them have begun searching for new options to replace the revenue from royalties. But many say that because royalties aren’t enforceable on-chain, they will never be sustainable.
Are zero percent or optional royalties the a superior model, or could there be other solutions?
What are NFT Royalties?
NFT royalties are a percentage (usually zero percent to 10 percent) that creators set on marketplaces in order to compensate them each time one of their NFTs sells.
In early 2021, when NFT volume picked up, the standard royalty was 2.5 percent. Later on in the year, many increased their fees to 5 percent to keep up building for their highly popular ecosystems.
The free mint meta began at the start of 2022, which was a business model of free minting with a higher royalty percentage. Projects like Truth Labs’ Goblintown are one example of this.
The biggest challenge? It is difficult to enforce royalties on-chain within the smart contract. Therefore, project creators have left it to secondary marketplaces to dictate it. But developers are actively working on ways to enforce royalties by code, or blacklist certain marketplace contracts in their own smart contracts.
The 0% Royalties Debate
Some projects like CryptoPunks have always been at 0 percent royalties — instead keeping a percentage of all minted NFTs. But this was rare when many popular projects initially took off in 2021.
As NFT flipping has become more prominent, many searched for alternatives to OpenSea when selling their NFTs to avoid paying royalties. With each trade, royalties take out a small percentage of profit, which adds up over time. It isn’t just flippers that do this, though; others are looking for savings while selling expensive NFTs.
0% Royalty NFT Marketplaces
X2Y2 released a 0 percent fee P2P listing service, and took some market share from OpenSea as a result. Collectors of many high-value NFT collections, especially Bored Ape Yacht Club, opted to circumvent royalties by listing there and on SudoSwap. Most of the lowest priced Bored Ape listings now are not on OpenSea, but other NFT marketplaces.
Other collectors completed trades with ETH or other NFTs directly with another person, again cutting out royalties altogether — though there is always a risk of being scammed in these transactions.
NFT marketplace LooksRare recently moved to remove creator royalties. However, they are replacing royalties with a 25 percent share of the marketplace’s protocol fees — or .5 percent of sales. However, this fee pales in comparison to most collections standard royalties.
Magic Eden, the top Solana marketplace which has since added Ethereum collections, has also moved to a royalty-free marketplace. On all of these marketplaces above, paying royalties is now optional for the buyer.
Tyler Hobbs’ QQL project blacklisted secondary sales in its smart contract to marketplaces that don’t enforce royalties, including X2Y2. X2Y2 was not happy, claiming Hobbs was compromising holders’ ownership rights. However, this will continue to be a last resort for artists and projects who want to enforce royalties.
Pros and Cons
Pros
The clear pro of NFT royalties are that artists are being paid for their work on a consistent basis, any time their work is sold. This is one of the driving forces and top use cases to bring artists to the NFT space. With these ongoing funds they can continue to build out their project and pay to live.
Lower mint prices with higher royalties can help projects succeed by providing an ongoing source of income. It can also bring more people into the space with a lower cost of entry.
Cons
Royalties can make liquidity difficult. Like it or not, NFT flippers seeking short-term gains are a large source of liquidity in the space. Without them, it will be harder to sell, and volume may decrease. This is especially the case with collections with 10 percent or higher royalties.
When people go off-market for transactions to avoid royalties, they are more prone to be scammed and hacked. But now that Pandora’s box is open, buyers and sellers will continue to skirt royalties, even with increased risk. So, some would say providing a reliable marketplace to do 0 percent transactions will reduce risk.
Magic Eden and Solana
While the largest Ethereum marketplace OpenSea still enforces royalties (for now), Magic Eden recently decided to move to optional royalties. Overnight, around 80 percent of trades that paid royalties decreased to 20 perecnt. They are primarily a Solana NFT marketplace, but also support Ethereum projects.
Volume in general across Solana dipped in the month of October after this news.
While Magic Eden accounted for 86 percent of all Solana NFT volume within the past month, Solanart and Hadeswap started cutting into their market share, and they needed a way to get some back. This move led to an increase in wash-trading and caused influencers and creators to weigh in.
One thing Magic Eden did do, however, was changing it from a seller’s fee to a buyer’s premium. This charges any royalties to the buyer, not the seller.
Frank, founder of DeGods and Dust Labs — the most popular Solana NFT collection — offered his own thoughts around 0 percent royalties and Solana NFTs. He made a controversial decision to set 0 percent royalties for his collections y00ts and DeGods, just a few days before Magic Eden — an investor in Dust Labs — announced the same.
An Unknown Future for NFT Royalties
Many have strong opinions on NFT royalties because of how crucial it is to scale Web3. Until it is possible to enforce royalties at a code-based level in the smart contract, secondary marketplaces will largely dictate what happens.
Without royalties, creators are left with some options. These include increasing prices on primary sales, encouraging tips to the creators, increasing supply, charging for additional utility, and discovering other revenue streams, like merch and events.
Other more system-wide solutions have been proposed to only do royalties on the gains amount, have larger collections create their own zero-fee marketplaces, restrict utility for those who don’t choose to pay royalties, and more.
Time will tell how all of us will come together as a community to incentivize creators, buyers, and sellers if royalties don’t exist.
The image accompanying this article was created using Dall-E 2 by Open AI.