NFT Royalties & Revenue

Many creators were sold on NFTs because they allow them to have a direct connection to holders. Not only in how they interact with fans, but in how they can continue to earn a living from their work in secondary sales. Sustainable revenue for artists was one of the dreams that web3 promised.

But that dream is coming to an end. Market forces (free markets, eh?) have indicated that royalty fees above 1% are on the way out. Existing projects are looking to contract swaps to guarantee royalties, while new ones are ensuring they are enforced from the start, but in many ways the landscape has already shifted.

Even if successfully enforced, it is clear that royalties can only be a small part of a wider revenue strategy for projects in web3. However, this isn’t entirely a bad thing…

The Pros & Cons of Royalties

There’s a heated debate right now about whether or not royalties are the best form of revenue for NFTs. Those for the idea point to the way they:

• provide ongoing value to creators as the value of assets appreciate and/or continue to be traded on secondary markets;
• enable projects to generate cashflow post-mint;
• minimise micro-flipping trades by providing a built in buffer between bids and floor;
• align incentives between project teams and holders.

Those against the idea that royalties should be the primary revenue stream of web3 feel that:

• Current royalty levels are too high and become a burden on both traders and collectors and extract too much value out of markets;
• there are numerous revenue options available, both traditional and innovative, that have been ignored due to an over-reliance on royalties;
• Royalties create unsustainable business models that can rarely be met over the long term;
• Strong projects that provide real-world utility and develop strong loyalty will have holders willing to make financial commitments.

Wherever you sit on the debate for/against royalties as revenue in web3, one thing is certain: all projects within the space need to adapt to royalty revenues that decrease over time.

Few projects can rely on huge amounts of volume indefinitely, even when they have ensured that royalties are baked into sales. It’s also important to recognise that this approach is, at least for now, running counter to market forces and consumer preference. As much as people might say that they are for royalty fees, few are voluntarily adding them if they don’t have to.

So whether royalties are going to see a return or not, it’s clear that projects need to look beyond them. Projects able to find new ways to ensure cashflow will gain more attention and potentially greater success in future.

Revenue Beyond Royalties

Thinking beyond royalties, what other forms of revenue have been successfully shown in web3 today?

There are a few methods that we’ve seen, to greater or lesser effect:

• VC-funding models that rely upon future success of a project and help build a multi-year runway to get there;
• Merch sales and products such as event tickets, customisation assets, game tokens etc.;
• Audience leverage through traditional means such as advertising, product placement and affiliate deals;
• Successive mints and collections;
• IP-licensing and brand partnerships;
• Token treasuries that buy-back after mint, to sell at a higher price point.

There are also some more traditional revenue streams that successful projects are starting to incorporate. These include:

• Subscription models built on soul-bound tokens;
• Service Provision including exchanges, utility platforms, advisory, technical consulting and white-labels etc.;
• Capital Investments / Social Impact Investments that generate a return;
• Closed ecosystems that provide tools and marketplaces to loyal holders, retaining both customers and fee-structures.

It’s clear that project teams are carefully considering what sustainable business models look like in web3. They will need to incorporate both the innovative revenue streams these technologies enable, alongside more traditional ways to generate cashflow that have been proven over the long term. Importantly, projects will need to find clear and sustainable ways to incentivise their holders to stay loyal and engaged.

In the end, revenue streams need to withstand huge market shocks and times in which there is a lack of consumer confidence in the entire sector. These kind of extreme market cycles are difficult to overcome… but if a project isn’t planning ways to navigate through them, then they have already failed. We have seen the result of this recently, as huge numbers of projects fold because they cannot maintain basic overhead costs.

Conclusion

Even though it’s possible to hard-code royalties into collection contracts, there has been a general downward trend in the amount of revenue that can be raised. Perhaps this will change in future as better sentiment and more users return to the market, but it can’t be relied upon and particularly not in the mid-term over the next 12–18 months.

Royalties go against the short-term interests not just of traders and speculators, but general consumers and the infrastructure sites that facilitate widespread adoption. There is a compelling argument to make that this shouldn’t matter, that creators should be prioritised as the lifeblood of the space, but unfortunately market dynamics are going to head towards where the consumer base wants to be. As we have seen in recent months, consumers overwhelmingly support near-zero royalties and are not willing to voluntarily add them to purchases or sales.

Because of this, projects need to build in more traditional business models that rely on consistent and repeatable revenue streams. This will come partly from a maturing consumer-base ready to support projects, but it also extends to teams that need to make sure their capital is working as efficiently and effectively as possible.

In the end, the debate over royalties means it’s more important than ever for project team and holder incentives to be aligned. Because when everyone is in the same boat, they can work together to achieve the same goals and the success of a project will naturally follow.

When this kind of alignment occurs, efforts are multiplied and success is easier to achieve for everyone involved. Projects with carefully constructed business models will rise above those that rely on fast injections of cash. When they do, they will find support among consumers desperately looking for authenticity and trust in a space filled with cash gabs and teams that often disappear overnight.

Revenue is the primary component of any successful business. Whatever we may feel about royalties idealistically, every project needs to ensure that they can move beyond an over-reliance on them. By doing so, they can approach their business holistically and carve out a niche in web3 over the long term.