Why NFT Artists Shouldn't Expect 'Royalties'

In crypto, code is law. Has OpenSea found an on-chain solution to the problem of paying token creators in secondary sales?

AccessTimeIconNov 7, 2022 at 6:25 p.m. UTC
Updated Nov 7, 2022 at 7:09 p.m. UTC
AccessTimeIconNov 7, 2022 at 6:25 p.m. UTCUpdated Nov 7, 2022 at 7:09 p.m. UTCLayer 2
AccessTimeIconNov 7, 2022 at 6:25 p.m. UTCUpdated Nov 7, 2022 at 7:09 p.m. UTCLayer 2

After months of silence, the largest non-fungible token exchange, OpenSea, announced it is taking the middle road on “royalties” paid to NFT creators. The move will likely reshape an ongoing debate as to whether these digital assets should automatically pay out “creator fees” when resold (which benefits artists) or nix that standard entirely (which is better for traders).

OpenSea’s new “on-chain enforcement” tool is essentially a snippet of code that NFT creators can add when building their smart contracts that will ensure they continue to receive a cut of the proceeds every time an NFT exchanges hands. This bucks the trend of marketplaces like X2Y2, LooksRare and SudoSwap that have eliminated or minimized a royalty system.

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As OpenSea CEO Devin Finzer wrote in an accompanying blog, when the NFT standard was introduced in 2018 royalties were pitched as a way to benefit a new class of creators who would otherwise be cut out of the growing value of their work. But then, as now, there was no actual mechanism that would ensure this form of ongoing compensation would take place.

OpenSea, and other early-to-market NFT exchanges, introduced “creator fees” in an attempt to attract builders to the industry. It began a core part of NFTs’ value proposition: You only need to hear so many accounts of artists who starve as their body of work increases in value to see why royalties, paid out in secondary markets, would be attractive.

“Until now, the primary thesis for this remarkable technology has been ensuring that artists get paid for their work,” Bobby “Bobby Hundreds” Kim, co-founder of fashion brand The Hundreds, said on Twitter. This thesis, however, has largely relied on exchanges to enforce it (and on the good graces of buyers to not find ways around it).

Beginning this summer, several NFT exchanges began to cut out royalties or treat them more like optional tips buyers could pay. This obviously angered several NFT artists who had begun to rely on the income stream, especially considering the market downturn. Eliminating or downsizing royalties benefits exchanges, also affected by the bear market’s dwindling trade volumes, and buyers.

While Bobby Hundreds is probably right to say “abandoning creator royalties throws the entire mission of Web3/NFTs off,” the move itself could be seen as healthy for the industry.

First, as mentioned, NFTs do not programmatically pay out fees to their original creators (though they could be upgraded to do so, if there was the will). By making tipping optional, exchanges are aligning with the actual technology rather than a cultural expectation. Creating or selling NFTs on a false pretense is bad, and the only way for royalties to work 100% of the time would require everyone to agree.

Second, NFTs are a general purpose technology and serve a variety of functions. Paying 5%-10% fees to companies like Ticketmaster, if they adopt the tech in time, seems gross. There are many types of NFT makers and market participants. Traders, operating on slim margins and moving price floors, were already finding workarounds to royalties.

Artists have boycotted some exchanges that moved away from royalties. For instance, X2YX has seen trading volume drop from 11,540 ETH on Aug. 26, the day it ditched royalties, to 547 ETH, Decrypt reported. “A month ago, around 75% of NFT buyers opted-in to paying royalties on [X2Y2], when given the choice,” Punk 9059 tweeted. “Now that number is around 18%.”

OpenSea’s new tool makes it easier for creators of new NFT collections to blacklist non-royalty exchanges. Some have called this move anti-competitive. It’s certainly self-serving, and a way to endear itself to the vocal NFT arts community. But seems like a practical solution considering the actual tech behind NFTs.

“In our opinion, by far the better option is for existing creators to explore new forms of monetization and alternative ways of incentivizing buyers and sellers to pay creator fees, and to ensure that future collections enforce creator fees on-chain,” Finzer, the OpenSea CEO, wrote. Exchanges too can create systems that incentivize tipping – like Blur’s token airdrops to fee payers.

(OpenSea’s on-chain system for new or editable collections will take effect on Nov. 8. It will decide whether to expand the tool to existing collections, and take on community feedback, on and until Dec. 8.)

Although there are strong arguments for indefinite creator fees, it was always unsustainable for artists to rely on exchanges to honor this system. The industry should foster a culture where tipping is expected. But unless put into code, no one should expect the rules to be enforced. That’s what crypto has always been about.

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Daniel Kuhn

Daniel Kuhn is a deputy managing editor for Consensus Magazine. He owns minor amounts of BTC and ETH.