One of the reasons artists and other creative folks are so excited about NFTs is royalties. Back in the day, an artist only made money one time from their creation. They would sell a painting for $100 (good!), but then sit and watch as that buyer turned around and sold that same painting for $10,000 (not so good). The artist got zero dollars and zero cents from that secondary sale.
Getting a cut of those secondary sales was a big reason then, that artists were attracted to NFTs. The smart contract in the NFT would automatically give the artist a cut of any future sales of their work. Win/win! Collectors still get the lion’s share of the money from secondary sales, and artists get recurring revenue, allowing them to make more art.
But here’s a fun fact: Turns out those automatic royalty payments in smart contracts aren’t so automatic. CoinDesk explained the situation pretty well a couple months back, writing:
…Royalty payments are only enforceable on a marketplace level, and not on-chain. An NFT buyer, for example, could send ether (ETH) to a designated wallet after making an off-chain agreement to buy their NFT, and the seller could send them that NFT with no marketplace as a middleman for the transaction, paying no royalty fees in the process.
Sellers on marketplaces such as OpenSea can program a designated fee into each sale, in most cases between 5%-10% of an item’s purchase price, but if a marketplace wanted to waive the fee altogether, there’s nothing stopping them from doing so.
NFT marketplaces like x2y2, Yawww and Sudoswap have decided to make royalty payments optional on their NFT transactions. Sure, in the short-term that means buyers pay less for their NFTs, but that also means the original NFT artists and creators could wind up getting [does math things, carries the one] zero dollars in recurring revenue.
(We should note that while these marketplaces are making NFT royalties optional, these same marketplaces are still keeping their transaction fee percentages firmly in place.)
Like a virus, you’re starting to see this zero royalty notion spread to other established marketplaces and even other NFT projects. Recently the Solana NFT project DeGods announced it was getting rid of its royalties as part of an “experiment.”
The leader of the DeGods project, who goes by the handle “Frank” posted to Twitter:
Honestly, I actually hope that our move to 0% accelerates real solutions that create enforceable royalties.
Whether or not Frank is actually altruistic or more mercenary remains to be seen. DeGods already made $6 million in secondary sales of its y00ts NFTs, and Dust Labs, the startup associated with DeGods raised $7 million in venture funding last month. So Frank and Co. are doing just fine.
But what about the newer and smaller NFT projects? If market forces push them to abandon royalties, will they even get off the ground? Or worse, will it spur more rug pulls?
The longer-term consequences of all this have yet to reveal themselves and raise a lot of questions:
- Will burning tens of thousands of creators counting on royalties threaten the future of NFTs?
- Will creators need to charge more for initial mints, shutting people out?
- Do creators get in an arms race with marketplaces, each writing code to continuously circumvent each other?
- Will consumers now expect to pay zero royalties all the time?
- Will fewer NFT projects and games launch because there is no longer a secondary revenue stream?
All these moves to get rid of royalties feels very web 2. It’s like something Amazon would do – use its size to undercut competition, squash innovation and grab marketshare. It also seems to fly in the face of what web3 is supposed to be about – community and empowerment. Like, web3 is great during the good times, but do its fundamental beliefs get immediately abandoned to protect losses during a downturn?
Obviously, we have a horse in this particular race and would love to see a robust and revenue-generating secondary market. NFT sales is how we generate revenue to fund our Game Developer Fund and pay small, independent developers to make games. We are confident that ultimately technology will create enforceable smart contract revenue to creators, but if in the meantime the Web3 community burns all the creators that took an early bet on NFTs for their music and art, how long will it take to regain their trust? Can we?
Part of being a web3 company is open dialogue, something we hope this post spurs. We’d love to hear from the members of our community. What do you think about not paying royalties on NFTs? Head over to our Discord and share your opinion!
We felt that this issue was also too big to contain in just one blog post, so we brought in Benny from NFT aggregator Hyperspace for a lively discussion on our Jump Pod Unioverse podcast.