NFT Artists Should or Should NOT Expect ‘Royalties’?

After months of silence, OpenSea, the world’s largest non-fungible token exchange, has declared that it will take a middle ground on “royalties” given to NFT developers. The decision is expected to change an ongoing discussion over whether these digital assets should automatically pay “creator fees” when resold (which favors artists) or whether that norm should be abandoned entirely (which is better for traders).

OpenSea’s new “on-chain enforcement” tool is essentially a piece of code that NFT developers may include in their smart contracts to ensure they continue to receive a portion of the proceeds every time an NFT is traded. This goes against the trend of markets such as X2Y2, LooksRare, and SudoSwap, which have scrapped or reduced their royalties scheme.

When the NFT standard was established in 2018, royalties were marketed as a method to aid a new class of creators who would otherwise be left out of the growing value of their work, as OpenSea CEO Devin Finzer wrote in an accompanying blog. However, there was no practical system in place at the time to ensure this type of continual reimbursement occurred.

In order to lure builders to the business, OpenSea and other early-to-market NFT exchanges implemented “creator fees.” It started a major part of NFTs’ value proposition: You only need to hear so many stories about artists starving as the value of their work improves to understand why royalties paid out in secondary markets would be appealing.

“Until now, the primary thesis for this wonderful technology has been ensuring that artists get rewarded for their work,” said Bobby “Bobby Hundreds” Kim, co-founder of fashion label The Hundreds, on Twitter. This idea, on the other hand, has been largely supported by exchanges (and on the good graces of buyers to not find ways around it).

Starting this summer, several NFT exchanges began to eliminate royalties or treat them as optional gratuities that purchasers may pay. This clearly irritated numerous NFT artists who had come to rely on the cash stream, especially given the market slump. Eliminating or reducing royalties benefits exchanges, which are similarly impacted by the bear market’s reduced trade volumes, as well as purchasers.

While Bobby Hundreds is probably correct in saying that “abandoning creator royalties throws the entire mission of Web3/NFTs off,” the act itself could be viewed as beneficial to the business.

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First, as previously said, NFTs do not pay out payments to their original developers on a regular basis (though they could be upgraded to do so if there was the will). Making tipping optional aligns trades with actual technology rather than a cultural expectation. It is illegal to create or sell NFTs under false pretenses, therefore the only way for royalties to operate 100% of the time would require everyone to agree.

Second, NFTs is a general-purpose technology that can do a range of tasks. Paying 5%-10% fees to corporations like Ticketmaster if they embrace the technology on time appears reprehensible. NFT manufacturers and market participants come in a variety of forms. Traders were already discovering ways around royalties while working on razor-thin margins and shifting price floors.

Some exchanges that have moved away from royalties have been boycotted by artists. For example, X2YX’s trading volume dropped from 11,540 ETH on Aug. 26, the day it dropped royalties, to 547 ETH, according to Decrypt. “A month ago, almost 75% of NFT buyers chose to pay royalties on [X2Y2] when given the option,” Punk 9059 tweeted. “That figure is now approximately 18%.”

The new tool from OpenSea makes it easy for the creators of new NFT collections to prohibit non-royalty exchanges. This action has been dubbed anti-competitive by some. It’s obviously self-serving, and a ploy to gain favor with the vociferous NFT arts community. However, given the technology behind NFTs, it appears to be a viable answer.

“In our opinion, the far better solution is for existing creators to investigate new kinds of monetization and alternate means of incentivizing buyers and sellers to pay creator fees, and to ensure that future collections enforce creator fees on-chain,” commented Finzer, CEO of OpenSea. Exchanges, like Blur’s token airdrops to fee payers, can develop systems that incentivize tipping.

(On November 8, OpenSea’s on-chain infrastructure for new or editable collections will go live.) On and until December 8, it will decide whether to expand the tool to existing collections and solicit community feedback.)

Although there are compelling reasons for indefinite creator fees, relying on exchanges to uphold this scheme has always been unsustainable. The industry should cultivate a culture in which tipping is anticipated. No one should expect the rules to be enforced unless they are codified. That has always been the essence of cryptocurrency.

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