The future of NFT royalties 🔮

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Dear Bankless Nation,

Huge numbers of artists have arrived in the cryptoeconomy over the past few years.

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.

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.

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 we’re definitely about to see is an explosion of new NFT marketplaces. Allow me to explain for today’s Metaversal!


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Thinking about the future of NFT royalties

First, the basics of NFT royalties

Let’s say Alice mints an NFT and sells it to Bob for 1Ξ.

Later, Bob resells that NFT to Charlie for 5Ξ in a secondary sale transaction on OpenSea.

Because Alice set her royalties to 10% on OpenSea, she receives 0.5Ξ from the exchange.

However, historically OpenSea has tracked and paid out these royalties using its own off-chain system.

If Alice hadn’t set her royalty parameters and OpenSea didn’t use this system, she wouldn’t have automatically earned 0.5Ξ. It’d be up to Bob to manually send that payment, and in most cases that volunteering just wouldn’t happen.

Why are things like this? Because there currently isn’t a great way to enforce NFT royalties at the smart contract level.

You could cake a royalty fee directly into an NFT’s 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 you’re just sending an NFT to another one of your wallets or gifting it, for example.

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 don’t “talk” to each other because there’s no standard.

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 hasn’t garnered widespread adoption yet.

The Royalty Registry lookup system

All that said, in recent months we’ve 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 … maybe.

What’s new

OpenSea recently announced that it had created a new on-chain royalty enforcement tool that can “restricts NFT sales to marketplaces that enforce creator fees.”

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:

We recognize this is a first step, so we’re 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 won’t 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 – and we’re 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.”

Understandably, this declaration has generated a ton of community debate and discussion. *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.

Others have noted that the OpenSea on-chain royalty blocklist is a “no-brainer” for NFT projects once you start drilling down into recent royalty statistics.

Whatever OpenSea ends up deciding next month, it’s clear that all NFT marketplaces will need decisive royalty stances so creators can readily decide where’s best for them.

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.

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.

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.

However, what about those middle ground projects like Art Blocks releases, XCOPY’s 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, what’s 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.

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.

Whether the underlying infra is based on sudoswap, Reservoir, Zora, or beyond, these creator-owned marketplaces — which can be managed by individuals or artist DAOs — 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.

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 it’s made for real life-changing revenues for many creators, and it’s 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. We’ll see!

Action steps

Author Bio

William M. Peaster is a professional writer and creator of Metaversal—a Bankless newsletter focused on the emergence of NFTs in the cryptoeconomy. He’s also recently been contributing content to Bankless, JPG, and beyond!

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Not financial or tax advice. 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. 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 our investment disclosures here.

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