A growing trend in the NFT field is the elimination of creator ownership rights among the major NFT groups, markets and platforms.
In the last example, one of Solana’s largest NFT groups by ground price (275 SOL, ~$8,250) and traded volume (1.4 million SOL, ~$42 million), DeGods and associated groups y00ts and t00bs, announced that it would remove originator revenue from transactions secondary school across the three groups. With this announcement, the founders of the project updated the DeGods group that specifies that royalties will be reduced from 9.99% to 0%.
Following DeGods’ decision, market leader Solana NFT market leader Magic Eden, which has a market share of 77% by volume, announced that the market is no longer charging royalties and moving to voluntary royalty payments on their platform. This means that secondary purchasers of NFTs can choose to pay royalties to the originator.
Oddly enough, the announcement came a month after the launch of Magic Eden MetaShield, a tool that identifies NFTs listed and traded in markets that bypass creators’ equity. In some cases, Magic Eden hides images of NFTs listed by owners who have not previously been honored with royalty payment.
NFT creators have two main sources of income: the primary sale of NFTs as well as ongoing royalty payments from secondary transactions paid for in perpetuity. Royalties are usually set at a fixed percentage of the NFT price paid by either the buyer or the seller, depending on how the market structures the transaction. The royalty percentage is chosen by the creators and is usually set between 5% and 15%.
Copyright has been widely hailed as one of the true innovations in the field of NFT, enabling project founders and artists to forge a new monetization model that consistently rewards their efforts over time.
The Ethereum-based decentralized NFT trading platform, Sudoswap, may have been the first platform to open debate that challenges the concept of creators’ equity by launching an automated market maker that eliminated royalties payments on secondary transactions altogether. Sudoswap caters to active traders and speculators, and by removing royalties and thus offering better prices, DEX believes it can gain a stronger foothold among the community of NFT traders.
The automated market maker Sudoswap launched in July of this year and offers NFT trading with only 0.5% fees. This is significantly lower than competitor OpenSea which charges a transaction fee of 2.5%, as well as charging creator equity, pushing the total fee to nearly 10%. This fee is paid by the NFT vendor.
Since its launch in July, Sudoswap has generated $65.2 million in total transaction volume and has accumulated $323,000 in platform fees across its 33,600 total users and 226,000 total NFT trading. During the same period, NFT’s leading OpenSea market generated $1.6 billion in total volume with an average of 359,000 monthly active users. Thus, even though Sudoswap has offered a convincing value proposition and has seen significant growth since its launch, users still choose to trade the existing OpenSea. This may be due to OpenSea’s current network effects, market dominance, and ability to attract both casual and experienced NFT users.
Interestingly, while removing royalties could theoretically increase demand for projects, particularly in this climate where the net effect could be a 10% discount, in the case of DeGod’s announcement, the opposite appears to be true.
Prior to the announcement, the DeGods floor was priced at ~390 SOL ($11,700 at the time of writing). On the day the announcement was made, October 9, the ground price of DeGods fell 36% to as low as 250 SOL ($7,500), and has since rebounded to 275 SOL ($8,250) today. The market has clearly indicated that it does not appreciate the transition to zero royalties to the group, which raises doubts about how the project’s founders will remain committed to developing the project over time.
“As the old saying goes, ‘Show me the stimulus and I will show you the result.’” Hasib Qureshi, Managing Partner at Dragonfly Capital, said that this is the iron law of cryptocurrency – unless you have a mechanism to enforce something, the competitive dynamics will undo it.” It is exactly what is happening with royalties today. This does not mean that it is the end of the road. People will innovate and experiment with new models that eventually match the incentives.”
According to Magic Eden co-founder Zhuoxun Yin, for the average NFT creator, 92% of their revenue has historically been generated through primary sales and 8% through royalty payments on secondary deals. This indicates how the status quo of primary sales drives the majority of income to artists and creators.
Expectations and implications
This industry-wide shift away from royalties has left NFT creators, collectors and advocates wondering how projects should finance themselves and spur the founders’ continued engagement and commitment going forward.
If the market structure moves towards eliminating royalties completely, the founders and creators of the NFT project will need to be more creative in terms of how they monetize their efforts. The market may see more initial declines to supplement the loss in income from royalties. In addition, Creators may seek to charge for additional benefits such as concerts, events, merchandise, and subscriptions, which may otherwise have been funded through royalties. Creators may also seek to limit commercial rights, copyrights, trademarks, and other intellectual property rights on NFTs that are sold in secondary markets without royalties.
Moreover, creators may be incentivized to hold back a greater proportion of the supply from the NFT pool to monetize their business. For individual high-value and rare projects, they may also choose to split their work and keep a percentage of the premium supply representing ownership of the piece. However, these solutions are imperfect and treat compensation as equity, rather than providing a continuous and sustainable income stream.
On the other hand, developers are actively working on new token standards designed to enforce royalty payments at the smart contract level. Two proposals to improve Ethereum, EIP-2891 And the EIP-4910 It aims to automatically process royalty payments across all NFT marketplaces and ecosystem participants, preventing merchants and central authorities from circumventing payments they are legally entitled to to creators.
Even if these proposals prove effective, NFT markets, platforms and participants need to willingly adopt and implement these token standards. This will require greater recognition of the value of royalties and a willingness to prioritize compensating creators over traders by the broader market.
Regardless of which path royalties ultimately follow, investors and collectors must evaluate projects on a case-by-case basis. While royalties can be compressed or eliminated entirely, token and Web3 technologies will enable new business models that create value for the entire ecosystem.
The NFT marketplace Blur recently launched its own trading platform on Wednesday that caters to professional traders, perhaps providing a solution that offers a compelling compromise. The market has implemented incentive royalties, which incentivize traders to respect royalties by not charging royalties but by rewarding those who transact with the $BLUR token.
Content creators still need to demonstrate their commitment to providing lasting value to their communities in order for the project to succeed. Before creators can release NFTs for sale, they must demonstrate that they are active members of the Web3 community and are able to use their distribution channels to drive engagement and prove the value of their work. They need to clearly communicate their project roadmap and systematically deliver on the promises they make, which is a surefire way to build goodwill among the broader Web3 community.
Creators are a rare commodity, and success stories in the Web2 world have instructed us that users and fans will follow their favorite talents. This is why Spotify paid Joe Rogan $200 million to release the podcast exclusively on its platform. However, creators will take cues from the broader market and experiences within the broader market will result in a balance that rewards both creators and their fans.