Betty

Royalties.&nbsp;



A concept most of us are familiar with — yet before 2021’s NFT boom, something most artists had never experienced before. The increased perceived value of digital art during this time — both culturally and financially — as well as the promise of royalties in perpetuity following an initial sale, attracted droves of artists and creators to begin releasing their work as NFTs on-chain. Communities formed, brands were born, and we saw the emergence of a new pathway for creators to find success through their work.



Every day, social feeds seemed to be flooded with stories of artists making a life-changing sale. Talented creators were suddenly able to bypass much of the convoluted and archaic traditional art hurdles to opportunity, and carve their own course through the power of cryptocurrency, social media and community. This period was short, fast and euphoric.&nbsp;



As is the case in most brand-new and burgeoning industries, there were problems.&nbsp;



Despite many creators believing otherwise — royalties were not enforceable at a smart contract level. The point of enforcement always came at the point of sale, ie., through the marketplaces.&nbsp;



This worked well when marketplaces honored the enforcement of a creator’s set royalties along with their own marketplace fee — some even had this in their terms of use. However, as the market slowed down and competition for market share became fierce, most major marketplaces introduced optional royalties or zero royalties in late 2022 (notably preserving their own marketplace fee for the most part).&nbsp;



Fierce royalty debates followed, mostly coming from a yes or no, right or wrong perspective. Creators rallied, and a portion of marketplaces flipped on their decision, stating they would support continued royalties.&nbsp;



As it stands now, many have abandoned this stand, and we face a potential reality where creator royalties may be a thing of the past. A short-lived attempt at a truly fair market for all participants.&nbsp;



Greed and shortsightedness has cut opportunity and innovation off at the stem — docking the flow of decentralized opportunity to new talent.



It is my opinion that royalties are an essential part of the ecosystem we have collectively grown over the last few years. Royalties play their part in a delicate balance of value exchange that had not been seen in action at scale before. Marketplaces, traders and creators were acknowledged, and people were able to independently have real impact.&nbsp;



Almost every single Web3 company that started as an NFT project you can name today was initially funded by mint, then a steady stream of royalties. These royalties were then responsible for the astronomical valuations we saw in 2021 and 2022, and the influx of VC funding into said companies — just as marketplace fees resulted in massive growth and investment for the marketplaces themselves.&nbsp;



This industry was literally built on royalties.&nbsp;



There are arguments that royalties are not a reliable revenue stream and should not be relied on for brand building — but the fact is, they’re not just brand building for most people and never were. For many, royalties are school fees, new equipment, mutual aid and more.&nbsp;



By removing royalties for others now a handful of people have “made it,” we cripple momentum and take massive steps backwards. We completely remove the ability for people to build outside of systems that do not serve all equally.



After observing and engaging in the royalty debate over the past year — I am still steadfast in my belief they should be protected.&nbsp;



No, royalties are not a reliable revenue stream in the depths of a bear market and shouldn’t be the sole income of any company at any time.&nbsp;



No, royalties should not apply to all <a href="https://blockworks.co/tag/nfts">NFTs</a> or projects. 



No, the enforcement models we all adopted were not ideal and were worryingly centralized.



But we need to look at this issue of royalties objectively. None of this is established or set in stone yet — we are building the tracks as we go.



A point I want to make very clear is that creators should always be sovereign over how their work is created, published, distributed and handled. Once those elements are determined, a collector is free to choose whether or not to purchase or interact with that work. That is choice. What is not choice, is a person or entity imposing their chosen methods onto the creator.



Creators have realized this, with many choosing to list on their own marketplaces, mint with their own smart contracts, and remove their work from larger platforms. Large brands have realized this, with companies like Yuga openly speaking out against the removal of royalty support from marketplaces.&nbsp;



We will see this continue to happen. I believe if the marketplaces that made their wealth off the backs of creators continue on the path they have chosen, they will hasten their race to zero — but the industry will continue without them. Trading of NFTs will splinter into purpose-built marketplaces that honor the intention of the creations themselves. Gaming, fashion, fine art, PFPs will have their own platforms, and innovative ways to incentivize the continued concept of creator royalties will allow the industry to continue to flourish and grow.



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Betty is the CEO and Co-Founder of Deadfellaz, a first-of-its-kind project that launched in 2021 as an NFT collection of 10,000 zombies and has rapidly evolved into a modern-day media company cemented in pop culture. A celebrated Web3 thought leader driving conversations, Betty consistently brings progressive ideas and creative solutions into the spotlight, with the ultimate goal of building bridges from internet futurists to the traditional media world. She is a passionate advocate for inclusivity and creator rights in Web3. With a track record of successful Deadfellaz partnerships with Wrangler, DraftKings, Rolling Stone and Chicago Bulls, Betty has become a resource for Web2 brands to authentically engage in Web3.</div>


<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

Greed killed NFT royalties. The marketplaces that dropped them could be next

Shalini Nagarajan

Bored Ape Yacht Club (BAYC) creator Yuga Labs has blacklisted addresses from marketplaces that don’t support royalties for NFTs like its latest Sewer Pass mint.



Differing perspectives on <a href="https://blockworks.co/news/web3-nft-ape-dao-hot-wheels">the enforcement of creator royalties</a> has been a hot topic among NFT stakeholders, including marketplaces, some of which <a href="https://blockworks.co/news/sudoswap-erupts-as-nft-traders-capitalize-on-royalty-free-sales">have decided to make them optional</a>.&nbsp;



BAYC had already announced that the Sewer Pass NFT will be listed on OpenSea, which <a href="https://docs.opensea.io/docs/10-setting-fees-on-secondary-sales#:~:text=That%20means%20a%202.5%25%20fee,in%20the%20My%20Collection%20editor." target="_blank" rel="noreferrer noopener">enforces royalties</a> for projects.



&#8220;We’ve always been a creative-first company, and we believe that creator royalties must be protected,&#8221; a Yuga Labs spokesperson told Blockworks via email. &#8220;The Sewer Pass free claim will only be traded on platforms respecting creator royalties.&#8221;



LooksRare, Sudoswap, Blur and NFTX have all opted to stay away from the NFT royalty model, instead leaving the option to the buyers to decide whether to honor an artist’s royalty policy. Blockworks has reached out for comment.



Certain conditions in the Sewer Pass <a href="https://etherscan.io/address/0x849b59222d093011726d829475C81C79F90ed932#code" target="_blank" rel="noreferrer noopener">smart contract</a> include a blocklist of certain wallet addresses, which were noticed by the crypto community and <a href="https://twitter.com/locationtba/status/1615792932296196096" target="_blank" rel="noreferrer noopener">shared</a> on Twitter.&nbsp;



Some of those addresses appear to be linked to marketplaces like LooksRare, NFTX, Blur and SudoSwap.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Was taking a read through <a href="https://twitter.com/yugalabs?ref_src=twsrc%5Etfw">@yugalabs</a> Sewer Pass contract, and saw that it&#39;s referencing a contract that was deployed a week ago. The contract is labeled as a Registry and there&#39;s a bunch of transactions adding to the blocklist. Presumably one of the addresses is <a href="https://twitter.com/blur_io?ref_src=twsrc%5Etfw">@blur_io</a>&mdash; location tba (@locationtba) <a href="https://twitter.com/locationtba/status/1615792932296196096?ref_src=twsrc%5Etfw">January 18, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<a href="https://blockworks.co/news/nft-royalties-sometimes-they-work-sometimes-they-dont">NFT royalties</a> are essentially payouts to creators, offering them a cut from the secondary sale of their digital assets on a marketplace. Beeple, one of the best-known NFT creators, himself gets a <a href="https://www.reuters.com/lifestyle/digital-only-artwork-fetches-nearly-70-million-christies-2021-03-12/" target="_blank" rel="noreferrer noopener">10% royalty</a> each time his NFTs are resold after the initial sale.



The <a href="https://icy.tools/collections/sewer-pass/overview" target="_blank" rel="noreferrer noopener">Sewer Pass</a> is a key providing access to Yuga’s skill-based interactive game <a href="https://twitter.com/BoredApeYC/status/1613331130249256962" target="_blank" rel="noreferrer noopener">Dookey Dash</a>, a game in which players will face obstacles testing their survival until top scorers can earn rewards.&nbsp;



The pass has four tiers, depending on the kind of NFTs the holder has. The floor price for a Tier 1 pass last stood at 1.4 ETH as of Thursday, while Tier 4 was selling for around 420 ETH. Currently, a <a href="https://opensea.io/" target="_blank" rel="noreferrer noopener">trending</a> collection, it’s already captured 6,510 ETH ($9.9 million) in sales volume since going live on Wednesday.



Yuga isn’t the only one to block marketplaces for their policy. NFT artist Tyler Hobbs added X2Y2 to a blacklist in his QQL collection due to its flexible royalty model. X2Y2 eventually <a href="https://twitter.com/the_x2y2/status/1593631425483657216" target="_blank" rel="noreferrer noopener">changed its decision</a> and followed OpenSea’s model.



This story was updated on Jan. 19, 2023 at 12:22 p.m. ET, with a statement from Yuga Labs.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

Yuga Labs Blacklists Royalty-avoiding Marketplaces

Casey Wagner

Thanks to widespread, emerging marketplace policies, NFT creators looking to cash in on royalties have been having a <a href="https://blockworks.co/news/web3-watch-sec-probes-yuga-labs-degods-eliminates-nft-royalties" target="_blank" rel="noreferrer noopener">difficult go of it</a>.&nbsp;



Until yet another set of standards for corresponding smart contracts that execute NFT transactions are put into place, that’s not likely to change, according to a new research note from Galaxy Digital.



Earlier this month, OpenSea changed up its royalty policy again. Before that, the platform required all projects released after Nov. 8 to use an open-source smart contract that prohibits digital collectible exchanges between OpenSea and rival NFT market makers that don’t collect any royalties. Any transactions involving corresponding smart contract addresses were set to be blacklisted.&nbsp;



“OpenSea is effectively enforcing royalties on their marketplace at the smart-contract level by enclosing their ecosystem exclusively to royalty supporting entities,” Galaxy analysts wrote in the Friday report.



Read more: <a href="https://blockworks.co/news/nft-royalties-sometimes-they-work-sometimes-they-dont" target="_blank" rel="noreferrer noopener">How NFT Royalties Work – and Sometimes Don’t</a>



In an effort to quell public backlash, OpenSea first changed its policy. Now, starting in the new year, “projects on OpenSea will have the option to opt out of using the royalty enforcing smart-contract and be able to set royalties that are optional for collectors to comply with,” according to Galaxy.&nbsp;



Magic Eden — which previously followed a royalty-optional model — now employs an open-source royalty enforcement tool on top of Solana&#8217;s SPL token standard, known as Open Creator Protocol (OCP). The protocol is supposed to additionally enforce royalty payouts by blocking transactions with smart contracts associated with 0% royalty platforms.&nbsp;



Zero royalty payments in the NFT space have increased in popularity, as well as usage, this year, with at least three such marketplaces hitting the market for the first time, including X2Y2, Yawww and SudoSwap.&nbsp;



NFT creators <a href="https://blockworks.co/news/nft-royalties-top-1-8-billion-galaxy-digital" target="_blank" rel="noreferrer noopener">raked in</a> more than $1.8 billion on the practice from its inception through October, Galaxy found in a separate report at the time. It’s a big number, but the setup has led to quite concentrated results, according to Galaxy: Just 428 collections had then accounted for an overwhelming 80% of all royalties.



“But the royalty question is contentious and the constantly shifting marketplace policies make forecasting here unpredictable,” Galaxy said.&nbsp;



If creators want to keep royalties going, it’s going to require a broader industry effort, according to Galaxy.&nbsp;



“The issue will not resolve until the NFT community develops a new standard to enforce royalties at the smart-contract level that is not reliant on blacklisting contract addresses,” the report added.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

NFT Creators Looking for Royalties Face an Uphill Battle: Galaxy

John Gilbert

Ornella Hernandez

In an era of artists recouping fractions of a cent on music streams and visual artists lacking any revenue share from the speculative secondary market — NFT royalties were bandied about as a trump card for artists vying to set up sustainable business models.



Now, with the move from <a href="https://cms.blockworks.co/web3-watch-twitters-potential-crypto-wallet-and-a-royalty-optional-looksrare/" target="_blank" rel="noreferrer noopener">X2Y2, Looks Rare and Magic Eden to make NFT royalties optional</a>, artists are once again playing defense.&nbsp;



Because the smart contracts underpinning NFT royalties lack legal enforcement mechanisms or any other outside accountability, it appears the technology is only as good as the platform’s commitment to uphold it.&nbsp;



And, with ImmutableX’s swift launch of a <a href="https://cms.blockworks.co/immutable-alex-connolly-on-protecting-nft-creator-royalties/" target="_blank" rel="noreferrer noopener">community-managed NFT marketplace blacklist</a>, scores of skeptical artists and NFT collectors have been asking how the tech actually works — and if artist royalties can be saved.



<h3 class="wp-block-heading">What are NFT royalties?</h3>



NFT royalties are crypto payouts designed to proffer creators a cut of secondary sales of their digital collectibles. The percentage of sale designated for royalties is set by the creator at the time of minting — typically around 6%. Smart contract platforms where NFTs are minted are, in most cases, responsible for automating the payments.



The key to the success of revenue sharing lies in previous attempts to institute universal baselines for artist resale royalty rights. It explains why NFT royalties matter to the Web3 narrative and where the system currently falls short of its intended purpose.



<h3 class="wp-block-heading">Why artists need resale revenue</h3>



Artists have long struggled to find fair compensation. Artists such as Harvey Ball, famous for creating the yellow smiley face in 1963, was only paid $45 for his iconic image. The t-shirt company that used it later sold for $500,000,000 in 2000. And Robert Rauschenberg in 1958 sold his painting “Thaw” for $900. Just a few years later it changed hands for $85,000.



Once the intellectual property of both artists left the building, they lost all rights to downstream payments. That would not be the case if they had rights to royalty payments from secondary sales.&nbsp;



Resale royalty rights are the legal entitlement to a percentage of proceeds made from selling an original artwork. The right is either granted by the state or a contract between the artist and reseller. And in the US, save for California, artists can only access this right through individual contracts.



In 2013, The <a href="https://www.copyright.gov/docs/resaleroyalty/usco-resaleroyalty.pdf" target="_blank" rel="noreferrer noopener">United States Copyright Office reported</a> that visual artists are at a unique disadvantage compared to other creators when it comes to revenue generation.&nbsp;



Because the value of their art is derived from uniqueness, little money can be made from reproduction. The inherent nature of visual art excludes it from the type of royalty contracts between musicians, record labels and streaming platforms.



The music industry has its own set of challenges when it comes to fair compensation. The streaming model has cut artists out of a large share of royalties. Projects such as Blocktones have found creative ways to royalties into their music based NFTs.



Artists in the US have attempted to institute universal baselines for artist resale royalty rights through legislation, but each attempt has failed. And while some of these rights exist for Californians — and in some countries such as France — the requirements are easy to evade due to the lack of cross-border enforcement.



The ability to offer artists an easy system to collect royalties from NFT resales is what convinced many artists to enter the NFT market. Without royalties, the technology lacks an alternative to the artist’s monetization model.



<h3 class="wp-block-heading">How NFT royalties work</h3>



The NFT royalty system can differ between blockchains, but with Ethereum, it is managed at the discretion of smart contract platforms.



With Rarible, for example, the artist can set the percentage of resale proceeds at the minting stage via a smart contract on the blockchain in question.&nbsp;At the time of purchase, the platform automatically executes the terms of the contract. Platforms differ in the specifics of payout schedules.



The terms do not represent a legal contract, though — typically in a bid to sidestep litigation.



Case in point: Per <a href="https://static.rarible.com/terms.pdf" target="_blank" rel="noreferrer noopener">Rarible’s terms of service</a>, creators must agree to grant the platform royalty-free rights to any content posted on the platform. So, even though the platform embeds the terms of royalties via smart contract, there is no legal obligation.



The legalese transfers the enforcement burden from civil authorities to code. But, because the automation still requires consent from the market maker, a series of thorny enforcement challenges have emerged.



<h3 class="wp-block-heading">Can you transfer royalties between marketplaces?</h3>



Royalty policies from other platforms do not automatically transfer.&nbsp;



OpenSea, for instance, only supports royalties on collections — not individual pieces. So, if an NFT with its own royalty policy is sold on Rarible, and then listed on OpenSea, the original artist would not see any revenue from the secondary sale. Additionally, OpenSea’s maximum royalty is 10% to Rarible’s 50%.



<h3 class="wp-block-heading">What are optional royalties?</h3>



NFT marketplaces such as LooksRare, Magic Eden and X2Y2 have all moved away from the NFT royalty model. Their new royalty-optional system lets NFT buyers decide to honor an artist’s royalty policy for purchases.&nbsp;



How? Well, even though royalties policies are immutable smart contracts, the Ethereum blockchain isn’t able to enforce stipulations on token transfers. Any enforcement of the smart contract is inherently voluntary. The platforms simply passed that option on to the buyers.&nbsp;



This means that for all existing and new NFT listings, royalty payments are discretionary. Some platforms including LooksRare have agreed to share 25% of protocol fees with creators in an effort to alleviate the effects to the artist revenue model.



NFT artists like Tyler Hobbs have started adding NFT marketplaces that evade royalties to a blacklist.&nbsp;



He added X2Y2 to the blacklist in his QQL collection following their decision to axe royalties. The move succeeded in blocking the collection from being listed, but platforms can develop workarounds. Some ecosystems such as ImmutableX are working on a <a href="https://cms.blockworks.co/immutable-alex-connolly-on-protecting-nft-creator-royalties/" target="_blank" rel="noreferrer noopener">community-managed whitelist and blacklist</a> that would implement broad enforcement across the Ethereum NFT ecosystem.&nbsp;



<h3 class="wp-block-heading">Is there evidence that NFT royalties offer sustainable revenue to artists?</h3>



During the early days of NFT launches, many projects and individuals generated millions from royalties on the secondary market. Today, the secondary market is not providing the same.



Bearish market conditions combined with a growing number of platforms abandoning royalties have all contributed to declining revenue. A look at Yuga Labs’ royalty payouts illustrates this decline:



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="523" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Yuga-Labs-Daily-Royalties-by-Collection-1-1024x523.jpg" alt="Yuga Labs Daily Royalties by Collection" class="wp-image-36934" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Yuga-Labs-Daily-Royalties-by-Collection-1-1024x523.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Yuga-Labs-Daily-Royalties-by-Collection-1-1024x523.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Yuga-Labs-Daily-Royalties-by-Collection-1-1024x523.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Yuga-Labs-Daily-Royalties-by-Collection-1-1024x523.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Yuga-Labs-Daily-Royalties-by-Collection-1-1024x523.jpg?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Yuga-Labs-Daily-Royalties-by-Collection-1-1024x523.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Yuga-Labs-Daily-Royalties-by-Collection-1-1024x523.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Yuga-Labs-Daily-Royalties-by-Collection-1-1024x523.jpg?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Yuga-Labs-Daily-Royalties-by-Collection-1-1024x523.jpg?w=1366 1366w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /><figcaption>Yuga Labs Daily Royalties by Collection | Source: <a href="https://dune.com/beetle/yuga-vs-proof-ecosystem" target="_blank" rel="noreferrer noopener">@beetle</a></figcaption></figure>



Many projects have shut down. But NFT collections such as <a href="https://cms.blockworks.co/web3-watch-sec-probes-yuga-labs-degods-eliminates-nft-royalties/" target="_blank" rel="noreferrer noopener">DeGods have responded by removing royalties</a> outright.



DeGods launched a collection of 10,000 Solana NFTs in October 2021. The project adds utility beyond the resale market by giving DeGods and DeadGods NFT holders the ability to stake and earn utility tokens.&nbsp;



While large projects with outside revenue sources can afford royalties, individual artists cannot. To illustrate, the NFT collection Fidenza by Tyler Hobbs has made a total of 3,999 ETH in royalty revenue, according to <a href="https://www.flips.finance/Dashboard" target="_blank" rel="noreferrer noopener">Flips.Finance</a>. The initial mint price was only .17 ETH, meaning royalty revenue exponentially outweighed mint proceeds.&nbsp;



Despite enforcement challenges, resale royalties have a major impact on an artist’s bottom line.&nbsp;



If an NFT transferred from OpenSea to LooksRare, the artists could still see royalties if the artist registered the collection. But as soon as LooksRare made royalty payments optional, the platform’s total volume rose dramatically, and royalty fees dropped close to 0.&nbsp;



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="523" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/11/LooksRare-Volume-Versus-Royalty-Fees-1-1024x523.jpg" alt="LooksRare Volume Versus Royalty Fees" class="wp-image-36933" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/11/LooksRare-Volume-Versus-Royalty-Fees-1-1024x523.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/LooksRare-Volume-Versus-Royalty-Fees-1-1024x523.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/LooksRare-Volume-Versus-Royalty-Fees-1-1024x523.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/LooksRare-Volume-Versus-Royalty-Fees-1-1024x523.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/LooksRare-Volume-Versus-Royalty-Fees-1-1024x523.jpg?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/LooksRare-Volume-Versus-Royalty-Fees-1-1024x523.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/LooksRare-Volume-Versus-Royalty-Fees-1-1024x523.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/LooksRare-Volume-Versus-Royalty-Fees-1-1024x523.jpg?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/LooksRare-Volume-Versus-Royalty-Fees-1-1024x523.jpg?w=1366 1366w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /><figcaption>LooksRare Volume Versus Royalty Fees | Source: <a href="https://dune.com/nftanalyst/lr-royalties" target="_blank" rel="noreferrer noopener">@nftanalyst</a></figcaption></figure>



<h3 class="wp-block-heading">The economics driving NFT marketplaces to drop royalties</h3>



The incentive for marketplaces to drop NFT royalties is simple. It attracts traders who want greater profit margins on NFT resales.&nbsp;



&#8220;Right now, we’re seeing some marketplaces looking for an edge during the current NFT market downturn, and they’re turning to tactics like eliminating mandatory royalties,” MakersPlace CEO Craig Palmer said in a statement. “MakersPlace has always been a firm supporter of creators and while this ‘optional’ approach where the buyer decides whether or not to pay royalties may make sense to other marketplaces, it doesn’t fit with our vision for the space.”



In addition to MakersPlace, NFT marketplaces such as Rarible and OpenSea are continuing to enforce royalties.



In response to Magic Eden and LooksRare transitioning to optional NFT royalties, Twitter user NFTstatistics.eth explained the economics in action.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Economics in action: If you think you are getting a competitive advantage by cutting royalties&#8230; you&#39;re actually just starting a race to the bottom. Everyone follows and we&#39;re back where we started, just now without royalties.&mdash; NFTstatistics.eth (@punk9059) <a href="https://twitter.com/punk9059/status/1585654054360739840?ref_src=twsrc%5Etfw">October 27, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">This has happened on Solana (MagicEden is back to 90% share now that they&#39;ve cut royalties) and is happening on ETH w LooksRare cutting out royalties This is a particularly pronounced process in NFTs since the fees being cut don&#39;t actually go to the company doing the fee-cutting&mdash; NFTstatistics.eth (@punk9059) <a href="https://twitter.com/punk9059/status/1585654843284197377?ref_src=twsrc%5Etfw">October 27, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



While there appears to be a race to the bottom, the network effects of a single platform&#8217;s decision to make royalties optional are limited to the degree of interoperability between NFT ecosystems.&nbsp;



Because Magic Eden supports both Solana- and Ethereum-based NFTs, the marketplace’s move to drop royalties incentivizes marketplaces in both blockchains to follow suit.&nbsp;



While the trend has grown across both blockchains, it has not yet triggered a similar pattern across NFT economies on the likes of Cardano.



Cardano NFT volume surpassed Solana’s for the month of October, with <a href="https://twitter.com/nftpowerranking/status/1587298873361342465?s=20&amp;t=bYjK7Xwb1eRfTNav3zS2ag" target="_blank" rel="noreferrer noopener">some speculating</a> demand for royalties as a large reason why. The theory: The artist-friendly setup attracted a new wave of artists and mints.&nbsp;



<h3 class="wp-block-heading">The future relationship between artists and NFTs</h3>



According to critics of optional royalties, this race to the bottom is a desperate attempt to keep users engaged. Yet, it robs Peter to pay Paul in the sense that benefits to traders come at the expense of the artist.



The royalty incentive only works when all major platforms agree to uphold them. If one breaks that disagreement, it’s not long before others follow.



The industry appears to be at a fork in the road. If it finds a way to enforce royalties at the protocol level — or even a legal level — then it may succeed where lawmakers failed.&nbsp;



But most proposal upgrades appear to have loopholes that would allow for similar problems to emerge.&nbsp;



The alternative is to find a different carrot. If NFTs succeed in implementing a sustainable business model without royalties, others may follow.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.