The future of NFT royalties š®
Custom creator-owned marketplaces ftw!
Metaversal is a Bankless newsletter for weekly level-ups on NFTs, virtual worlds, & collectibles
Dear Bankless Nation,
Huge numbers of artists have arrived in the cryptoeconomy over the past few years.Ā
A major pull for these creators?
The ability to earn royalties from secondary sales of their works.
However, in the current paradigm NFT royalties are ultimately opt-in.Ā
NFT marketplaces have traditionally honored these royalties via off-chain infra, but many marketplaces have recently moved to make these payments explicitly optional or cut out altogether.Ā
OpenSea is the latest project to be exploring its options here, and that deliberating has many wondering what comes next?
In my opinion, one thing weāre definitely about to see is an explosion of new NFT marketplaces. Allow me to explain for todayās Metaversal!
-WMP
š Sponsor:Ā Sorare - Collect, Play, Win. Own Your Game.āØ
Thinking about the future of NFT royalties
First, the basics of NFT royalties
Letās say Alice mints an NFT and sells it to Bob for 1Ī.Ā
Later, Bob resells that NFT to Charlie for 5Ī in a secondary sale transaction on OpenSea.Ā
Because Alice set her royalties to 10% on OpenSea, she receives 0.5Ī from the exchange.Ā
However, historically OpenSea has tracked and paid out these royalties using its own off-chain system.Ā
If Alice hadnāt set her royalty parameters and OpenSea didnāt use this system, she wouldnāt have automatically earned 0.5Ī. Itād be up to Bob to manually send that payment, and in most cases that volunteering just wouldnāt happen.Ā
Why are things like this? Because there currently isnāt a great way to enforce NFT royalties at the smart contract level.Ā
You could cake a royalty fee directly into an NFTās transferFrom() function, but that would make it so the sender always has to pay a fee regardless of the transaction. This approach is bad if youāre just sending an NFT to another one of your wallets or gifting it, for example.Ā
As such, in recent years NFT marketplaces have used siloed off-chain systems to enforce royalties. OpenSea has its own tech, other markets have their respective infra, and these systems donāt ātalkā to each other because thereās no standard.Ā
This has led to cases of NFT royalties not being honored when NFTs minted on one platform are sold on another. Some innovative efforts, like The Royalty Registry, have been created to help NFT marketplaces get onto the same on-chain royalty standard, but this system is ultimately opt-in and hasnāt garnered widespread adoption yet.Ā
All that said, in recent months weāve seen more and more NFT marketplaces cutting out NFT royalties or making them optional, like Blur, LooksRare, X2Y2, and sudoswap. Now it looks like OpenSea could be the latest domino to drop here ā¦ maybe.Ā Ā
Whatās new
OpenSea recently announced that it had created a new on-chain royalty enforcement tool that can ārestricts NFT sales to marketplaces that enforce creator fees.ā
Moreover, the company said it would take until December 8th, 2022, to decide its final stance on royalties, with one possibility being a move to optional royalties altogether:
āWe recognize this is a first step, so weāre committed to engaging with our communities about solutions for existing collections. In deference to how difficult it is to enforce fees on chain for existing collections, we wonāt make any changes for existing collections through at least December 8, 2022. To be transparent, the consideration set for what happens after December 8 is wide open ā and weāre considering options ranging from continuing to enforce off-chain fees for some subsets of collections, to allowing optional creator fees, to collaborating on other on-chain enforcement options for creators. We recognize not all creators, collections, and communities are the same and we are looking to create a long-term policy that reflects that.ā
Understandably, this declaration has generated a ton of community debate and discussion.Ā *Update 11/10/2022: OpenSea has confirmed it will maintain royalties for all collections.
Some, like the Bored Ape Yacht Club team, have argued that whiffing on royalties would be backsliding against the very creators who have made OpenSea great.Ā
Others have noted that the OpenSea on-chain royalty blocklist is a āno-brainerā for NFT projects once you start drilling down into recent royalty statistics.Ā
Whatever OpenSea ends up deciding next month, itās clear that all NFT marketplaces will need decisive royalty stances so creators can readily decide whereās best for them.Ā
For example, Nifty Gateway just declared it will always honor NFT royalties and unveiled its own proposal for a creator royalty standard. Look for other marketplaces to similarly break one way or the other on the issue going forward.
Toward many bespoke NFT marketplaces
Different types of NFTs trade in different ways.Ā
For example, a 10k profile picture project like BAYC is highly liquid and has high volume. A cryptoart 1/1 piece, say an early XCOPY NFT, is illiquid and has low volume.Ā
These differences lead to unique dynamics, like 10k collections becoming popular on optional royalty platforms, e.g. Blur, and 1/1s remaining dominant on royalty-friendly platforms like Nifty Gateway and SuperRare.Ā
However, what about those middle ground projects like Art Blocks releases, XCOPYās Grifters, or Finiliar where the artistry is absolutely central but the NFTs trade like liquid collections rather than 1/1s? Should these creators forfeit their royalties just because their works trade on optional or no royalty platforms unlike 1/1s?
I say no, get that revenue. And I say the same for artists in general when it comes to NFT royalties. But how, whatās really the best way forward here for creators big or small? In my opinion, the answer is the proliferation of custom creator-owned NFT marketplaces.Ā
In other words, in the future every artist and project may have their own bespoke marketplace that is custom tailored for their respective NFT needs, including royalty needs.Ā
Whether the underlying infra is based on sudoswap, Reservoir, Zora, or beyond, these creator-owned marketplaces ā which can be managed by individuals or artist DAOs ā can offer incentives, e.g. NFT airdrops, to consolidate trading activity and better guarantee ongoing royalty payments.
The idea? To make your marketplace the premier destination for your work so your fans want to come there and trade when they have to or want to. And as innovation around NFTs continues to bloom, look for these DIY royalty-friendly marketplaces to become easier and easier to create.Ā
Why it matters
The research arm of Galaxy recently estimated that nearly $2 billion worth of NFT royalties have been paid out on Ethereum to date. In my mind, that figure is one of the greatest achievements of the young cryptoeconomy because itās made for real life-changing revenues for many creators, and itās reminded us that we can live in a world where creativity is very valuable.
In a certain sense, NFT royalty discussions are only just beginning, but I know many will continue to fight to help creators grow their royalties, and I think many artist-owned marketplaces could be a powerful answer here. Weāll see!
Action steps
š Check out the recent OpenSea creator royalties announcement
š Read my latest tactic How to collect content NFTs
Author Bio
William M. Peaster is a professional writer and creator of Metaversalāa Bankless newsletter focused on the emergence of NFTs in the cryptoeconomy. Heās also recently been contributing content to Bankless, JPG, and beyond!
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Not financial or tax advice.Ā This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.
Disclosure.Ā From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See ourĀ investment disclosures here.
Long-time reader, pleasant surprise to see my own tweet in here
Nice