NFT royalties have presented new opportunities for creators to participate more equitably in the secondary market and build sustainable long-term communities around their practice.
Despite this, more and more traditional NFT marketplaces have recently been allowing their users to opt out of paying royalties. Good news for traders, but with a big downside: the move away from royalties has removed an important source of passive income for most creators.
At Blockparty, we believe royalties are fundamental to the value proposition of Web3 and they ought to be protected and enforced. In the absence of creator fees, NFT projects might have very little incentive to keep building and creating. In this article, we offer a deep dive into the current royalties landscape in order to get a better understanding of its opportunities and challenges.
Contrary to popular belief, NFT royalties aren’t hard-coded into the market – let alone individual smart contracts. Most NFT marketplaces operate on a goodwill basis as they choose to honor a creator's desired percentage of royalties received per secondary sale.
A major flaw in the way the NFT ecosystem infrastructure was built is that creator royalties are not executed at a smart contract level, meaning there is no way to technically enforce them through code. While an NFTs smart contract can provide information about the royalty amount and recipient, creators are at the mercy of centralized third parties to execute the terms of the contract, defeating the whole Web3 ethos of permissionless and trustlessness.
Because there is no technical way to enforce royalty allocations, each marketplace can decide whether to offer or honor them. This lack of standardization has led to a number of dominant aggregators shifting to an optional royalties model following the 2022 market crash, a trend which denies creators of one of their most vital sources of income in a bid to attract more buyers and provide massive amounts of liquidity to the platform.
In a cut-throat market environment, it's every marketplace for itself. Sudoswap was the first to introduce 0% royalties for its automated market maker (AMM), and other marketplaces like X2Y2 and Blur followed with optional fees, instead leaving it up to NFT buyers to honor an artist’s royalty policy for purchases. Effective royalty rates for major NFT collections have drastically plummeted:
Creator royalties often serve as a lifeline for independent creators and NFT project teams. Although initial mint sales can be substantial, creator royalties can be viewed as a more consistent revenue stream that can be used toward day-to-day expenses and overhead costs. Conversely, mint sales are comparable to company equity which can be used to fund larger investments or initiatives.
Creator royalties frequently provide new NFT collections with a sustainable way of extending their project's runway instead of having to eat into their ‘equity.’ Unless another revenue stream is created, the project will have no other sources of income to meet short term expenses like paying off artists, community managers, and web subscriptions.
This could be hugely detrimental to the health and stability of the NFT market. Without royalties, project owners are financially incentivized to either increase their initial mint prices to generate more revenue in the beginning or mint more of the collection’s supply to sell over time. This could result in a knock-on effect which negatively impacts the value of the NFT itself.
Where Can We Go From Here?
In its short existence, the blockchain and crypto world is at its very best when it successfully promotes desired behaviors and outcomes through financial incentives, as opposed to coercion or enforcement. As creator royalties are not enforced on the smart contract level, market dynamics will follow the path of least resistance and are financially incentivized to bypass such fees.
Incentivizing royalties is a balancing act and it is clear that greater levels of innovation in the space need to occur to ensure that incentives between creators, long-term collectors and traders are aligned. As it stands, these incentives slant in favor of traders while creators get the short end of the stick. That isn’t to say there aren’t builders actively trying to remedy the situation though.
Limit Breaks ERC721-C
Recently, blockchain gaming company Limit Break announced a new creator token contract, ERC721-C, designed to give creators direct control over royalty settings and reduce the influence that marketplaces currently wield over them.
The ERC721-C standard lets creators choose where their NFTs are sold and filter interactions from the contracts and applications of their choosing. By blocking zero-fee exchanges from platforming their works, creators can prevent traders from circumventing royalties as any collection created with ERC721-C can simply opt out of trading on these marketplaces altogether.
ERC721-C also incentivizes collectors to pay royalties as sales could be automatically split between, say, members of a DAO or winners of a contest. This not only enables creators to customize their royalty logic but also opens up new avenues for rewarding collectors through community building initiatives.
Custom Trading Interfaces
Our MultiDEX toolkit is designed to offer creators more control over their secondary market by enabling them to create and customize their very own decentralized exchange for NFTs. At a time when NFT royalty policies are constantly shifting, hosting your own dedicated trading interface can help you incentivize royalty-paying collectors and ensure the creator fee is always paid.
We’re currently looking for alpha partners with big ideas to build with! If you are a creator or project looking to create your very own custom DEX with Blockparty, sign up to our waitlist. In the very near future, we will be working with clients on a case-by-case basis to create custom implementations uniquely tailored to your project needs.
Ultimately, the future of the NFT creator economy hinges upon the royalty debate. By addressing this issue and finding ways to empower creators, we can ensure that the industry remains vibrant, dynamic, and fair for everyone.
