In late August, non-fungible token (NFT) marketplace X2Y2 stopped requiring buyers to pay royalties on the platform. Instead, they would be allowed to elect the percentage they would like to contribute to the artist rather than being forced to pay an amount chosen by the creator. That percentage can be 0 on most purchases.
“Dominant aggregators intend to provide similar functionality in the imminent future” X2Y2 said in a tweet announcing the move to a royalty optional model. “As such, X2Y2 would like to make sure we are ready [and] staying on top of market movements.”
X2Y2 wasn’t far off in its prediction – and may have been the first domino to fall.
In October, Solana-based NFT marketplace Magic Eden said it would adopt a similar model, making creator royalties optional. A representative from Magic Eden told CoinDesk that while the decision to switch to a royalty optional model was difficult, “the collectors’ need for low-fee NFT trades stands in contrast to the creator’s need to receive royalty payments.”
Last week, Ethereum-based platform LooksRare followed in their footsteps, making royalties an optional step at checkout, for those who still wish to pay them. LooksRare said the marketplace would instead distribute 25% of fees the platform collects to creators and collection owners to support creators in the “new landscape.”
As the roster of platforms dropping their royalty requirements continues to grow, it’s sparking heated conversations on the impact on the creator economy that Web3 has fostered.
What are royalties?
In the world of NFTs, royalties are fees that creators earn on secondary sales each time their work changes hands. In the world outside NFTs, you might have heard of musicians earning royalties on people using or playing their music, or that authors earn a percentage of sales of their books as royalties. But traditional artists like painters do not earn royalties from resales. Collectors, not artists, have traditionally reaped the rewards as an artist’s work becomes more popular and valuable.
With NFTs, artists most commonly select a percentage they want buyers to pay in royalties when they first list their NFT for sale.
Les Borsai, co-founder and chief strategy officer of fintech firm Wave Financial told CoinDesk that NFT royalties, which alleviate some of the pain points in the traditional art world that Web3 sought to fix, are now back in the limelight as platforms nix their royalty requirements.
“Artists have never received [payments] from the secondary markets. Platforms taking the royalty model away are taking money out of the artists’ pockets,” said Borsai. “The platforms are asking the artists to trust them, in terms of artist payment allocation. But what is the formula? Where are the checks and balances?”
The move to make royalties optional isn’t just impacting creators. It’s also contributing to sliding trading volume.
According to daily trading volume data from Dune Analytics, from August 26, the date X2Y2 said it would make royalties optional, to today, the volume on X2Y2 has fallen from 11,540 ETH to 547 ETH – or $18,971,298 to $903,304. Dune data also shows LooksRare’s trading volume has fallen from $7,004,141 to $5,447,802.
While Magic Eden’s trading volume fell to a low of 56,556 SOL, or $1,854,471, on October 14, the day Magic Eden said it would go royalty optional, according to data from Dune, it has bucked the downward trend of the other marketplaces abandoning royalties. As of writing, it is at 170,726 SOL, or $5,688,590, a surge that can be credited to a new drop from Y00Ts, showing the power of popular collections to drive trading volume.
These plunges in trading volume may be associated with ETH’s 60% decrease since the beginning of this year, but regardless of ETH’s price there appears to be less interest from buyers on these platforms that have sacrificed their creator contributions.
OpenSea, the leading NFT marketplace, has yet to switch to optional royalties – and it might be to their benefit. From September to October, Dune reports that monthly trading volume fell from $348,901,376 to $319,250,807 – much smaller of a loss than these other marketplaces.
Why are platforms eliminating royalty requirements?
NFTs attract buyers ranging from dedicated collectors to fast-moving traders seeking to make a profit. Mashiat Mutmanniah, NFT lead at global blockchain payments firm Celo, told CoinDesk that the platforms switch on royalties is a move to retain the latter category. Thus the platforms are eliminating the Web3 ethos of “prosperity, equitable ownership and autonomy for fair compensation” that technologies such as NFTs have provided for artists.
“It shifts the focus away from creators, community building and incentivizing co-contributors in pursuit of sales,” said Mutmanniah. “This is backfiring as marketplaces attempt to retain buyers, but they should expect to lose creators and their respective communities.”
While it’s likely that more platforms will continue to eliminate royalty requirements, some are bolstering their mission to support creators.
On Wednesday, Solana-based NFT marketplace Exchange.ART said its creating a “Royalties Protection Standard,” to help creators enforce where their assets are listed across platforms that will ensure buyers pay them a percentage for their work.
Originally created as a platform to support fine artists who struggled with galleries taking profits and not having royalties associated with their work, Exchange.ART hopes to build out the infrastructure that will preserve the Web3 ethos being challenged by platforms removing royalties.
Last week, Find Satoshi Lab, known for creating Stepn, created MOOAR, an NFT marketplace that is committed to enforcing creator royalties by enforcing a range of optional payments to the creator between 0.5% and 10%.
However, there are also on-chain implementations to help solve this issue.
Anthony Georgiades, co-founder of the blockchain Pastel Network, told CoinDesk that the company’s product Smart Mint, which allows users to implement royalty standards into the smart contracts of their NFTs, is actively looking for ways to help users understand their royalties and implement them into their tokens.
While he sees the negative impacts that the current market conditions have on these assets, he said this may be a long-term positive thing, with developers advancing technology to prioritize royalties and keep earnings consistent between platforms.
“It should be noted that this move away from royalties has to do with some of the existing technical challenges of managing and enforcing various royalty standards that exist today,” said Georgiades.
As creators continue to see the impacts of platforms dropping royalty requirements, they may take on innovative approaches to attempt to standardize royalties, something that sits at the heart of the Web3 ethos that has fueled the rise of NFTs.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.