“They’ve got it all” How do royalties affect the NFT business and what happens if they are cut off at the ETH network

All through October, the NFT community has been arguing about royalties. Recall: Magic Eden added the ability for users to buy NFT without paying royalties to developers

At the time, many people thought it was the end of NFT and predicted dark times for the collections: there will be no money, the development will stop, and crypto is a scam. We’ll deal with the situation on Solana later, and now let’s take a look at NFT on ETH

We’ll find out what the royalties depend on, how much developers earn from it, and why their possible exit doesn’t change anything for the largest collections on ETH.

Important disclaimer: we understand that the situation at ETH might not be completely similar to the situation at Solana. If that’s how things work at ETH, things can be different at SOL

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What we researched

We uploaded volume data for the nine largest collections on ETH and calculated their royalty income on each day after the mint. The mint itself was also counted. The information about trading volumes was taken from the website https://cryptoslam.io — it counts the volumes according to the NFT collection’s smart contract data

The collections were selected by Total Value on OpenSea. In order to study the situation from different sides, we chose actively traded bluechips from Tier1, Tier2, and Tier3:

Tier-1 (Volume > 70,000 ETH): Doodles, Azuki, Moonbirds

Tier-2 (70,000 ETH > Volume > 30,000 ETH): Mfers, Goblin Town, Invisible Friends

Tier-3 (30,000 ETH > Volume): DegenToonz, Chimpers, SappySeals

We deliberately did not take huge collections like BAYC or CryptoPunks, despite their volume: now the market perceives them not as a trading asset, but as a means of savings, a status indicator. They perform a slightly different function and are not suitable for research

Dynamics of royalty for Tier-1, Tier-2 and Tier-3 collections. The blue line indicates the royalty in ETH, calculated according to the exchange rate on each particular day. The orange line indicates the royalty in USD. The volume in ETH corresponds to the left scale, the volume in USD corresponds to the right scale

We will further investigate only the royalties in dollars because it is very strongly correlated with ETH. This can also be seen on the graph: there are almost no cases where the blue graph lags far behind the orange one

In the next blocks of material, let’s look at the main conclusions that we managed to come to

The royalties are almost independent of the project

By and large, only two factors influence the change in the royalties: the distance between the trading day and the mint date, and the market situation

The farther away from the mint date, the lower the royalties will be. It is common for all projects, but for some, it is especially pronounced. For example, the volume of Moonbirds royalties is now less than 0.01% of the number of royalties in the early days of the project

The volume of Royalties for Moonbirds dropped radically after the mint date

The worse the market situation, the lower the royalties. The opposite is also true: when the market rises and trading volume rises, traders remember the old collections as well — royalties go up

You can see that the volume of Royalties in Tier-1 collections continued to remain somewhat the same

To make it easier for you to assess this correlation, we developed a weighted average of royalties, for all the collections under study. The weight of the collection in the sample was determined by Total Value

The weighted average “royalties index” for the selected collections directly correlates with the phase of the market

Royalties do not account for a significant portion of the economics of a project

We calculated the dollar amount of money the collections received from Mint and compared it to the total amount of royalties the project has managed to earn over its lifetime

The volume of royalty income as a percentage of total income from the mint. You can see that most projects earn more than 50% of their total royalty income from the mint. Some — like Moonbirds and SappySeals — particularly stand out

In the later stages of development, royalties make almost no money

This is the most important part of the article. In the last month, developers on Solana have often said that they don’t have any more money to develop the project

Practice shows that in the later stages of ETH project development, royalties bring almost no money and are a very small fraction of a percent of the total profit of the project

We calculated the developers’ cumulative profit and see what we got:

The capital calculation took into account the income from the mint. It turned out that the capital increase after the collection launch date compared to the total amount of money earned is almost zero

Important FAQ on what’s above

We’ve put together a few questions we want to anticipate. These conclusions follow from the research:

📌 Do royalties encourage authors to perform better?

Apparently not very much. For all the collections we researched, we did not find statistical patterns and unexplained outbreaks of royalties. As a rule, they happen because of the market situation, which cannot be influenced

📌 What will free-mint collections do if royalties are cancelled?

Apparently, not much. But they can announce an appropriate mint price and collect the money

📌 And if the money earned runs out? How do you develop next?

To get as much as developers get now from royalties, all you need to do is invest a very small portion of the original profits in not very risky assets

If the developers haven’t done this, then it’s bad financial management.

I hope the article was interesting and understandable!

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