Why is Everyone Talking about Royalties
No matter what side of the fence you are on, the meta around NFT royalties is shifting. Some don’t want to pay fees, and others have no issue. Let’s look at how NFT royalties affect users and businesses in the market.
What are NFT royalties?
Much like in the traditional sense of royalties in music, movies, and TV. Artists earn royalty payments every time a song, movie, or show is played. NFTs have a built-in royalty structure. We’ve previously covered how creators are earning more than ever with Web3. A large part of that is due to the blockchain being able to track digital assets. While marketplaces provide automatic payments to creators, every time an asset sells. For artists, this became an untapped revenue model. Generally, their commissions would start and stop at the point of the first sale.
The royalty structure of NFTs became an instant disrupter for creatives. The idea that creatives could continue to earn a % of every sale of their art in perpetuity was unheard of until now. It became a major catalyst for onboarding artists of all likes into the space. It opened doors to photographers, musicians, and physical/digital artists looking to monetize their art in new and unique ways.
So why is everyone talking about royalties?
For weeks if not months the only conversation that was happening on Twitter was about royalties. Why are royalties becoming a tipping point of conversation? P2P (peer-to-peer) trading places have begun stepping on the toes of marketplaces. Why is this relevant? Well much like traditional peer-to-peer sales no one is there to enforce a royalty payment. When you walk up to a yard sale and buy a vintage band tee no one is giving the band a kickback on their merch. The same is happening with P2P trading on the blockchain.
P2P trading hasn’t been a talking point because finding a person to do a trade with wasn’t an easy process. You have to go join Discord and find someone willing to do a trade with. The process is less than convenient than listing on a marketplace with liquidity flowing at all corners. Why are users looking for P2P trading options though? Well, think about BAYC for a second. The floor for the collection at the time of writing this is 83.5 ETH (~$113,000) with a creator fee of 2.5% + a marketplace fee of 2.5%. That's roughly 4.175 ETH (~$4,826) in fees per sale and that cost scales with the price of ETH.
A 2.5% fee from BAYC is quite nominal in the space when creators can ask up to 10%+. That being said, the nearly $5K in fees is money out of your pocket. That’s not factoring in potential tax obligations and gas fees. Progressive little slices coming out of your pie. So how do you eat your cake and not share a slice of the pie? P2P trading. By bypassing marketplaces there is no enforcement of royalties or marketplace fees. Money back in your pocket
As I mentioned earlier, the process of going about P2P trading isn’t convenient. What is convenient is going to a marketplace flooded with buyers and sellers. For the unsuspecting, there is an opportunity here. Create a P2P marketplace where users can self-manage their fees. and compete with the existing marketplace by claiming a piece of their pie. Look at this data from the P2P platform NFTTrader, on their platform alone users have saved 39.5M in fees!
This model is great for sellers especially the higher the price of the asset you are selling. The pinch isn’t felt as much at lower price levels. When fees are few dollars it feels negligible. You may not even realize you paid fees in some instances. Though as the value of the NFT goes up the more you’ll feel that 2.5–10% hit in your wallet. So what does this all mean in the bigger picture of royalties?
The problem.
Many NFT projects launched their business intending royalties to be their only revenue source. What happens when the majority of your holders start P2P trading? Well, your revenue starts to dry up, fast. If you can’t pivot this means your runway is evaporating in front of you at a record pace. If you’re an earnest project looking to deliver a new product or service this can come as a harsh reality check. Being agile and having the ability to pivot on a dime is essential.
The cynic in me feels this is a good thing for the industry as a whole. The royalty structure of NFTs encourages you to manipulate the market. Creating artificial pumps to drive secondary sales. Not to mention every time you do it successfully you’re rewarded with a nice lump sum payment. The problem is there is no incentive for you to do anything until your liquidity begins to dry out again. So you rinse, wash, and repeat the process.
You aren’t creating a new product, you aren’t delivering a service, and you aren’t building a brand. You are sucking liquidity out of the ecosystem. Only real businesses will be able to find new streams of revenue. How do you do that? By building actual utility, instead of selling hype packaged fugazi. This is a new form of market correction.
The drawback.
As I mentioned earlier, many artists were onboarded into the space under the impression that they could earn royalties for their work. Traders are rugging the artists. I empathize with the plight of the artist. We are all trading their creations, they should be getting their fair share. Artists getting cut out is a symptom of bootstrapped projects that aren’t in the position to pay artists up front. They are promised post-mint funds or percentages of fees after the fact. Thankfully, some are changing this.
The shift.
We’ve seen some experimental plays on how to adapt to the shifting landscape as it relates to royalties. Most recently ABC took an entirely different approach. All the artists were paid upfront, and creator fees were set to 0%. The project SKYrocketed overnight. Little did anyone know that one of the larger whales on ETH and SOL was behind the project. The one and only @HGE/9x9x9eth.
Major projects are rolling out SaaS products native to the industry. This isn’t new by any stretch but the rapid development of tools and services is almost at a fever pitch right now. New marketplaces with experimental fees and mechanics. Competition is afoot and it’s for the betterment of everyone in the space.
A possible solution.
Buyer side fees or a split between buyers and sellers. I personally haven’t seen an iteration of this idea rolled out yet. Currently, sellers are passing the fees onto buyers through inflated pricing. If the buyers had to pay creators fees on entry, we’d see less inflated pricing. Sellers are currently accounting for creator and marketplace fees with their listings.
In simple terms. Say I have an album I want to sell for $100 but I know I have to pay 10% in creator and marketplace fees. I would list the album for $110 so that I can get my $100 after fees. To curb the temptation of seeking out P2P marketplaces, we could flip the model and make the buyer responsible for paying creator and marketplace fees. In this new scenario. I list my album for $100, the buyer pays $100 + $10 in fees. The marketplace plays the role of collecting and distributing fees from the buyer.
The assumption here is that the sellers want out and are being penalized for doing so, they seek alternatives to avoid being penalized. Buyers want in so they’d naturally be happy to absorb the fees because they want to support the project/community.
How do you think we can solve the royalty problem?
Next steps
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