What Exactly Are NFT Royalties?

With the emergence and larger adoption of NFTs, new questions and challenges arise. Recently, one of the biggest debates in the NFT scene has been the issue of royalties. In this blog we will look at the concept of NFT royalties, what they are, how they work,  and why they do not work.

Artists and creators have always struggled to find sustainable financial models. Let us put ourselves in the shoes of the painter with the pseudonym Lexas. Lexas painted a picture of skyscrapers in New York and ends up selling it for $5,000 to an unknown buyer as part of a gallery exhibition he organised. After 4 years, the first buyer has found another buyer who is willing to pay $80,000 for it. If this sale goes through, Lexas will not be financially involved. Basically, he would only earn money from the first sale and earn nothing on the second, third, etc.

NFT royalties have solved this exact problem for creators and artists. With the invention of royalties, they could earn not only from first sales, but also from secondary sales that take place outside their reach.

So the story of empowering creators through web3 and NFTs has begun. By allowing creators to earn a percentage, usually 5 - 10 %, from the sales of their art on the open market, we started a big movement that is seen as a revolutionary step towards empowering creators and providing sustainable business models.

In February 2021, Beeple, a digital artist, received a 10 % royalty from the resale of his NFT artwork "Crossroads" on the secondary market for $6.6 million, which was more than 100 times the original sale price.

Royalties have become a big incentive in the NFT market. According to MilkRoad, Yuga Labs, creators of the BAYC, MAYC and Otherdeeds projects, took in $107.8 million in royalties alone in 2022.

https://twitter.com/MilkRoadDaily/status/1609967454272512001

Who was actually driving this narrative? NFT marketplaces.

Until recently, royalties were the norm in NFT marketplaces. But the inclusion of royalties in their platforms was their choice and goodwill. They are not legally obliged to enable royalties and cannot enforce them in smart contracts.

The marketplaces are only the intermediary and their role is to transfer the asset, the NFT, from one wallet to another.

What have the marketplaces done recently? They have made royalties optional and basically left the decision to the buyers. Currently, in most cases, royalties work as a tip-based system.

https://twitter.com/MagicEden/status/1581101016686399491

Last year we entered the bear market and therefore user numbers and volume declined. Marketplaces had to turn to new strategies and solutions. As the market changed, new players entered the scene. Blur, in particular, came on the scene with a hyper-trading platform that took the scene by storm and attracted many NFT traders. If your goal as a buyer is to trade the assets, royalties really do not make sense.

The elimination of royalties has encouraged trading as the main driver of the market.

https://dune.com/nftanalyst/lr-royalties

As you can see from the graph above, the NFT volume in USD was very close to the amount of royalties in October 2022. From then until now, royalties have gone towards zero.

Marketplaces are in a battle to attract and retain users. They compete from two sides: They need supply and demand. Abolishing royalties is a good strategy to meet demand and bring more buyers to the platforms. Namely, traders. On the supply side, however, it can have the opposite effect and discourage artists from using the platform. If we only satisfy demand and offer favourable conditions for trading without taking care of supply, this may not be a good long-term solution if we want the NFT market to continue growing.

To mitigate the impact of removing royalties, marketplaces such as OpenSea, MagicEden, Zora and others have launched a limited-time promotion to reduce platform fees for creators to zero.

We are not sure how the battle for users and the further empowerment of creators will go, but it's one to watch and follow. Royalties are definitely an improvement in the possibilities for creators to generate revenue in addition to initial sales. While technologically royalties cannot be forced, creators should, as Beeple says, ‘’work on building a collector base that will want to honor royalties’’.

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