I wasn’t preoccupied with the “good” kind of scarcity we talk about in Web3 (the kind that makes digital art more valuable due to a limited supply). I was, instead, concerned about the scarcity of resources available to creatives to protect their intellectual property (IP) – this includes writers like me who continuously generate new ideas for corporate entities that can then repackage, repurpose, republish and resell creative works in as many different forms as they’d like.
I chose self-employment after realizing that companies I’d written for in the past would forever have the right to turn my articles into newsletters, ebooks, social media threads, digital courses and more, yet I would never be entitled to additional compensation other than my fixed salary once that work was completed.
In a traditional creative industry, it often doesn’t matter how much value someone’s creative work generates. And unless you’re familiar with intellectual property designations or can afford skilled lawyers to negotiate on your behalf, artists are usually expected to create while big businesses handle the rest.
I soon learned that Web3 had already considered this dynamic and developed a tool to ensure NFT artists could continue to make revenue from their intellectual property. By utilizing smart contracts, artists could program lifetime royalties into all non-fungible token sales, which would automatically deliver a percentage of their profits to their crypto wallets in perpetuity.
Smart contract-based NFT royalties have been embraced by independent artists as a much-needed protection. But while smart contract-automated NFT royalties are the perfect Web3 antidote to years of creator exploitation, building the infrastructure to execute this vision has led to additional challenges.
The limits of smart contracts
Perpetual creator royalties are great in theory, though there are some logistical holes in enforcing them on-chain.
First, creator royalties are enforced by smart contracts, a type of blockchain-based code that executes instructions of a pre-determined agreement. In this way, smart contracts aren’t technically “smart” — the code is structured as a set of if/then conditions that execute according to specific inputs and triggers. Smart contracts are not a form of artificial intelligence (AI), because they don’t originate any generative outputs; the outcome can only be an option that has been predetermined.
Smart contracts aren’t technically contracts either. Governments aren’t obligated to recognize them as legally binding documents, whereas a contract between two individuals or corporations signed by both parties with lawyers present will always be valid in the eyes of a judge.
Ethereum co-founder Vitalik Buterin has even said he regrets giving smart contracts such a strong (and potentially misleading) title. He once said a more accurate description is “persistent scripts.”
Charlotte Kent, an arts writer and professor who wrote in April 2021 of the breakthrough potential of smart contracts, wrote almost a year later of our tendency to glorify them. “There’s a practical foolhardiness in the glorification of a sender/receiver model that eliminates all others, and an amusing foolishness in the assumption that smart contracts have actual legal standing,” wrote Kent.
Creator royalty controversy
Aside from the practical questions about smart contracts and creator royalties, there are the more economically driven issues that have surfaced in recent months. NFT marketplaces made headlines throughout the last quarter of 2022 for proposing to make creator royalties optional on their platforms in an attempt to attract more buyers. In November, a representative from the Solana-based marketplace Magic Eden told CoinDesk that switching to a royalty-optional model was meant to address “collectors’ need for low-fee NFT trades.” Several other marketplaces adopted similar policies to remain competitive.
Meanwhile, OpenSea doubled down on its commitment to royalty payments by blocking NFTs minted on OpenSea from being resold on secondary marketplaces that ban royalties. Skeptics theorized OpenSea’s tool was in actuality a covert attempt to keep all sales on its own platform, but OpenSea co-founder and CEO Devin Finzer responded by saying the move was an attempt to give artists more control over where their art is bought and sold.
“[Creator fees] are decided on a per-marketplace basis,” said Finzer. “Many marketplaces sprung up that decided not to honor creator fees.” In an attempt to circumvent these marketplaces, OpenSea launched a new set of smart contracts with advanced programmability.
Meanwhile, artists became vocal on social media and rallied on behalf of creators’ rights to control their own royalty structures. “We all talk to each other,” said prominent NFT artists and Deadfellaz co-founder Betty in a December 2021 interview with NFT-focused outlet NFT Now. “It came through the grapevine that [optional royalties] was going to happen, and we were all like — we need to act.”
Responses from the community
Many people attribute the no- or optional-royalties trend to low NFT trading volumes during the bear market, suggesting an exploitative, zero-sum mentality that prioritizes profits for centralized NFT marketplaces and speculative investors.
“As for OpenSea's back and forth, the way it has impacted artists like myself is that even though they've recanted their original intention on removing creator royalties to a certain degree, many are reluctant to mint on their platform,” said NFT nature photographer Lori Grace Bailey, who chose to mint a 50-piece edition on Sloika, a platform that Bailey says has “doubled down” on its commitment to protecting creator royalties.
There appears to be an expectation that artists (and loyal collectors) will simply migrate towards more creator-centric platforms. And compared to profile picture (PFP) community founders like Betty, one-of-one artists may feel as though they have less at stake, given that their art tends to circulate less on secondary marketplaces and therefore isn’t expected to generate considerable revenue through royalties.
“Royalties were, of course, one of the many aspects of NFTs that appealed to me,” said painter and NFT artist MJ Ryle. “As a one-of-one artist, it doesn’t impact me much. Primary sales can be challenging enough. Being in a position where royalties of secondary sales are a concern seems like a luxury to me!”
Meanwhile, musicians may have a unique take on royalties, says Steph Guerrero, head of marketing and business development at Legato.
“No other industry was affected by piracy like music was in the early 2000s,” Guerrero said, explaining that royalty payments suffered as streaming and torrent services gained popularity. “Musicians are already fighting for royalties of any use of music independent of Web3, but some big voices in the space are saying that musicians should only be paid through actual NFT sales, and in some cases, royalties only through secondary sales.”
She added that a royalty-optional or no-royalty model will put the onus on musicians to “constantly be creating in order to have revenue.”
What’s next in the creator royalty conversation?
After pushback from the artist community, several NFT marketplaces reversed course on their royalty-optional models.
Artists continue to have opinions about royalties and remain focused on advocating on behalf of creators. A favorite tool among artists is Manifold, a creator studio that provides the capability for code-free minting and customizable smart contract generation that protects royalties.
“I will continue to pursue any and all options, including minting pieces to my own contract via sources like @manifoldxyz, or on platforms that wholeheartedly reinforce their commitment to protecting creator royalties,” Bailey told CoinDesk.
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