NFT creators are looking to adapt now that royalties are starting to fade away
A growing trend in the NFT space is the elimination of creator royalties among major NFT collections, marketplaces, and platforms.
In the last example, one of the largest NFT collectives on Solana by floor price (275 SOL, ~$8,250) and trading volume (1.4 million SOL, ~$42 million), DeGods and their associated collections y00ts and t00bs, announced they would be removing their creator royalties from secondary transactions across the three collections. As the announcement was made, the project founders updated the DeGods collection specifying royalties would drop from 9.99% to 0%.
Following the decision by DeGods, leading Solana NFT marketplace Magic Eden, which has 77% market share by trading volume, announced the marketplace would no longer enforce royalties and move to optional royalty payments on their platform. This means that secondary purchasers of an NFT can choose whether to pay royalties to the creator.
Curiously, the announcement was made a month after Magic Eden launched MetaShield, a tool that identifies NFTs listed and traded on marketplaces that bypass creator royalties. In some instances, Magic Eden would blur the images of NFTs listed by owners that had not previously honored the royalty payment.
NFT creators have two main sources of income: the primary sale of NFTs as well as ongoing royalty payments from secondary transactions paid in perpetuity. Royalties are typically set to a fixed percentage of the NFT price paid by either the buyer or seller, depending on how the marketplace structures the transaction. The royalty percentage is chosen by the creators and is typically set between 5% and 15%.
Creator royalties were widely lauded as one of the true innovations of the NFT space, enabling project founders and artists to form a new monetization model that would continually reward their efforts over time.
Ethereum-based decentralized NFT exchange, Sudoswap, was perhaps the first platform to open up the debate challenging the concept of creator royalties by launching its automated market maker that removed royalty payments on secondary transactions completely. Sudoswap caters towards active traders and speculators, and by removing royalties and thus offering better pricing, the DEX believes it can gain a stronger foothold amongst the NFT trader community.
The Sudoswap automated market maker launched in July of this year, offering NFT trading with fees of just 0.5%. This is significantly lower than competitor OpenSea which levies a transaction fee of 2.5%, plus enforces the creator royalty, pushing the total fee up closer to 10%. These fees are paid by the seller of the NFT.
Since its launch in July, Sudoswap has done $65.2 million in aggregate transaction volume and accrued $323,000 in platform fees across 33,600 total users and 226,000 total NFTs traded. Over the same period, leading NFT marketplace OpenSea has done $1.6 billion in aggregate volume across an average of 359,000 monthly active users. Thus, although Sudoswap has offered a compelling value proposition and seen significant growth since its launch, users are still opting to trade on the incumbent OpenSea. This may be due to OpenSea’s existing network effects, market dominance, and ability to attract both casual and experienced NFT users.
SudoSwap volume
Interestingly, while removing royalties may theoretically increase demand for projects, especially in this climate, as the net effect could be tantamount to a 10% discount, in the case of DeGod’s announcement the opposite appears to be the case.
Prior to the announcement, the DeGods floor price was ~390 SOL ($11,700 at time of writing). The day the announcement was made, October 9th, the DeGods floor price shed 36% dropping to a low of 250 SOL ($7,500), and it has since bounced back up to 275 SOL ($8,250) today. Clearly, the market indicated it did not appreciate the move to zero royalties for the collection, drawing doubt on how the project founders would remain committed to developing the project over time.
“As the old saying goes, ‘show me the incentive and I’ll show you the outcome.’ This is the iron law of crypto—unless you have a mechanism to enforce something, competitive dynamics will cause it to get forked out,” said Dragonfly Capital Managing Partner, Haseeb Qureshi. “This is exactly what’s happening with royalties today. That doesn’t mean it’s the end of the road; people will innovate and try new models that are ultimately incentive-compatible.”
According to Magic Eden co-founder Zhuoxun Yin, for the average NFT creator, 92% of their revenue historically has been generated through primary sales and 8% through royalty payments on secondary trades. This points to how the current status quo of primary sales drives the majority of income for artists and creators.
This industry-wide shift away from royalties has NFT creators, collectors, and advocates wondering how projects will fund themselves and incentivize founders’ continual involvement and commitment moving forward.
If the market structure moves towards eliminating royalties entirely, NFT project founders and creators will need to be more creative in terms of how they monetize their efforts. The market may see a greater number of primary drops to supplement the loss in income on royalties. Additionally, creators may seek to charge for additional benefits such as concerts, events, merchandise, and subscriptions, which may have otherwise been funded through royalties. Creators could also seek to limit commercial, copyright, trademark, and other intellectual property rights on NFTs that are sold on secondary markets without royalties.
Furthermore, creators may be incentivized to hold back a greater percentage of the NFT collection’s supply to monetize their work. For high value and rare one-of-one projects, they may also choose to fractionalize their work and retain a percentage of the token supply representing ownership of the piece. However, these solutions are imperfect and treat compensation as equity, rather than providing a sustainable ongoing income stream.
On the other hand, developers are actively working on new token standards that are designed to enforce royalty payments at the smart contract level. Two Ethereum Improvement Proposals, EIP-2891 and EIP-4910 are aimed at automatically processing royalty payments across all NFT marketplaces and ecosystem participants, preventing traders and central authorities from circumventing the payments that are legally entitled to creators.
Even if these proposals prove to be effective, NFT marketplaces, platforms, and participants would need to adopt these token standards and implement them willingly. This would require a greater recognition of the value of royalties and the desire to prioritize creator compensation over traders by the wider market.
Regardless of the path royalties ultimately follow, investors and collectors must evaluate projects on a case-by-case basis. Although royalties may be compressed or eliminated entirely, tokenization and Web3 technologies will enable new business models creating value for the entire ecosystem.
NFT marketplace Blur recently launched its trading platform Wednesday catering towards pro traders, and it perhaps provides a solution that offers a compelling compromise. The marketplace has implemented incentivized royalties, which incentivize traders to honor royalties by not enforcing royalty payments but by rewarding those who do with the $BLUR token.
Creators still need to demonstrate that they are committed to providing lasting value to their communities in order for the project to be successful. Before creators issue NFTs for sale, they must demonstrate that they are active members of the Web3 community and are able to use their distribution channels to drive engagement and demonstrate the value of their work. They need to clearly communicate their project roadmap and systemically fulfill the promises they make, which is a sure way to build goodwill amongst the broader Web3 community.
Creators are a scarce commodity, and success stories in the Web2 world have instructed us that users and fans will follow their favorite talent. This is why Spotify paid Joe Rogan $200 million to release podcasts exclusively on their platform. That being said, creators will take cues from the wider market and experimentation within the broader market will result in an equilibrium rewarding both creators and their fans.
