Magic Eden Adopts Optional Royalties, Sparks Debate in NFT Space
Magic Eden has recently allowed optional royalties on its platforms. This article explains their reasons, the feelings in the community and the consequences of the move.
Et Tu, Magic Eden?
Magic Eden has long honored and pushed for the protection of royalties to creators, and has often appeared as the main critic of NFT marketplaces that adopted optional royalties. Then Magic Eden recently turned around and adopted its own optional royalty policy. Why?
On September 13, Magic announced Eden, the leading NFT Marketplace at Solana launch of Metashieldan NFT tool designed to protect royalties for creators.
Functions of Metashield include preventing non-fungible tokens (NFT) from being listed on specific marketplaces (those that support optional royalties), changing the NFT’s metadata, blurring or watermarking the image of the NFT until the royalties are paid, and even calculating the total debt accumulated of those who escape paying royalties.
Magic Eden fought to protect the royalties of creators, saying that “the hardest working creators are penalized in zero royalty marketplaces.”
On October 13, Magic Eden announced its partnership with Coral Cube, a marketplace and aggregator that allows optional royalties.
They clarified through a tweet (later deleted) that they are not adopting optional royalties, but are “merging” with Coral Cube.
However, Magic Eden doubled down by announcing a day later that they have decided to adopt an optional royalty policy.
🧵After some difficult reflection and discussions with many creators, we have decided to switch to optional royalties on @MagicEden.
Effective later today, we will also begin running a campaign to waive our platform fees.
— Magic Eden 🪄 (@MagicEden) 15 October 2022
Magic Eden provides reasons for adopting optional royalties
Magic Eden justified shifting its stance away from honoring strict royalties for creators due to several users choosing not to pay royalties on competing NFT marketplaces such as Sudoswap, Yawww, Solanart and Hadeswap. The number of NFT wallets choice of optional royalty marketplaces has increased significantly since July 2022.
Currently, it is impossible to enforce royalties at the protocol level; while smart contracts can have royalties built in, marketplaces can still code around them to avoid the royalties. This is somewhat counterintuitive to the common understanding of blockchain technology; that smart contracts and transactions must be immutable. Ultimately, it is up to the market whether they want to enforce the payment of royalties or not.
If Magic Eden continues to enforce royalties, it will eventually lose out to royalty-optional marketplaces. Since sellers on such marketplaces do not have to pay the extra 7.5% to 10% of fees, they can list their NFTs for a lower price than marketplaces with enforced royalties. Buyers will also prefer to buy from these marketplaces due to the lower selling prices of NFTs.
Ultimately, traders benefit from optional royalties, while creators suffer the consequence.
Reaction to Move by Magic Eden
The pivot to Magic Eden has received mixed opinions from the NFT community. Creators, traders and developers have expressed displeasure with various normal NFT communication channelswhile others chose to remain diplomatic.
Solana NFT marketplace Exchange Art tweeted“At an alarming rate, platforms have decided to treat artists as [a Stock Keeping Unit] instead of people. Royalties exist for a reason, and creators shouldn’t worry about being listed on sites that reject their rights. This is not acceptable and we simply will not tolerate it.”
Exchange Art even developed an OPT-IN mechanism to prevent users from trading NFTs on other platforms; thus guaranteeing creators receive royalties.
The pseudonymous co-founder of Deadfellaz, Betty tweeted that this move would “remove smaller creators from even starting without the huge advantages those who are funded and well-connected already have.”
A Washington, DC-based attorney who goes by the Twitter handle RickiCryptoStix wrote a Twitter thread that compared paying zero royalties to overfishing and pollution. He explained that without central intervention, the fishermen will overfish, and the producers will use the cheapest environmentally harmful methods of production. However, he says that a central body cannot enforce royalties but must be socially constructed; similar to how avoiding tipping in the US or not wearing masks in Japan is a social problem. He even suggests ways to enforce such social norms by identifying royalty evaders using bots.
The creator of NFT “Everydays: the First 5000 Days”, industry heavyweight Beeple, chose to remain diplomatic on the matter. He said that while he supports royalties, it is more sustainable to have a buyer’s premium, compared to a seller’s fee. This is because buyers are more incentivized to pay a premium to get into a project they believe in.
A consequence of Magic Eden’s dominance
To some extent, Magic Eden has only itself to blame for other NFT marketplaces adopting optional royalties. First, they have little choice because Magic Eden has the dominant share of the market.
It also has Magic Eden aggressively marketed botted NFT projects such as Shrouded Playground, Degentown, Okay Bears and Kings of da Street. This gave them a truckload of platform royalty; this made royalties a scapegoat and made it seem like royalties are the problem.
Since Hadeswap and Solanart adopted 0% platform fees and 0% creator royalty fees, they’ve taken subtle jabs at Magic Eden via Twitter, saying things like “Give all fees back to the people” and “This time YOU choose what is fair”.
Compensation to creators
While Magic Eden has embarked on the path of optional royalties, they came to this difficult decision after extensive deliberation.
To continue supporting creators, they plan to launch a $1 Million Creating Monetization Hackathon. This hackathon seeks to develop pro-royalty and alternative monetization tools.
Initially, when it comes to paying royalties on Magic Eden’s platform, instead of the typical creator fee applied to users who sell their NFTs, this fee will be passed on to the buyer, but with the option to choose whether they to pay or not. The default option will still be to pay full royalties.
One monetization tool for creators that Magic Eden comes with is Boots, an NFT upgrade service. Creators can use Boots to charge a fee to buyers to add new properties to their existing NFTs.
But can this type of monetization method (requiring a fee to upgrade properties) fully compensate for the lack of royalties? Upgradable properties have been a free feature used by some projects such as Edd Fox. NFT owners will not pay to upgrade their NFTs after paying for their NFTs.
An emerging NFT marketplace, Blur.io, also provides traders with optional royalties. However, they have a system to encourage merchants to honor royalties produces larger and rarer air droplets.
Why are creator royalties necessary?
Frank, the founder of Solana NFT DeGods, said that NFT royalties are not a moral privilege, but rather the best economic method to benefit both creators and holders.
NFT royalties should not exist because it is “the right thing to do”.
It is simply the best alignment of incentives between founders and holders (right now).
If you want to remove the royalties, that’s fine. Just don’t be mad when mint gets more expensive and more projects stall, lol.
— Frank (@frankdegods) 14 August 2022
Dccockfoster, co-founder of Nifty Gateway, compared paying royalties to paying taxes, tweeting that “given the opportunity, most people would opt out of paying taxes. Same with royalties – it’s just human nature.”
Imagine the chaos that would ensue if citizens had the choice to pay taxes or not. The government will not have enough funds to build important infrastructures such as roads, hospitals, schools and other facilities.
Similarly, without royalties, creators will have no incentive and no means to continue building on a project after it has been minted. There will be no reason to have a limited supply of NFT per collection; creators will only want to sell you more NFTs through mints. It is also pointless for creators to find ways to pump the floor price after the mint. Why would the project team even want to stick around and maintain the grassroots of their Discord community after their NFTs have been minted since they’ve already “raised their money”? In other words, users will see more carpet covers.
Royalties fuel the existence of all the things we love about NFTs, such as free coins, airdrops, de-blankets, low coin prices, and having an active community with constant interaction from the project team. Without royalties, all these “freebies” will cease to exist, and we can even expect to pay more during mints.
Royalties make up a large portion of income for creative industries such as music, film, comics, art, books, audio, podcasts, etc. Artists will avoid entering the NFT space, knowing that they will not receive royalties once their work is finished.
What about alternative income streams?
Proponents of zero royalties would argue that creators can seek alternative income streams instead of relying on royalties. But will alternative revenue streams provide the impetus for creators to provide the same value to an NFT project as we see today when royalties are in place?
Besides royalties, the current “main source” of income for most NFT projects is the mint. A project coin is more like a fundraiser in a Kickstart project to continue building the project.
Alternative revenue streams cannot be shared with NFT holders and do not incentivize creators to raise the minimum price of NFTs. This does not bode well for NFT traders whose main reason for entering an NFT project is to sell NFT for a higher price.
Furthermore, advocating alternative income streams and monetization tools like Magic Eden’s Boots will only provide more justification for zero royalties.
Conclusion
While we understand the importance of royalties and how they are critical to the ongoing development of NFT projects, we live in a selfish world where traders would avoid paying royalties if given a choice, and marketplaces want a larger share of trading volume. Furthermore, there is no way to enforce royalties in smart contracts technologically, and so it seems inevitable to go down the road to zero royalties.
NFT stakeholders should keep an open mind and find other possible ways to succeed in future NFT projects. We may eventually stop seeing the proven meta of free mint and airdrops. Yet it also means an opportunity for projects to explore new methods and tools to get people to invest.
The NFT industry is developing at a lightning fast pace; project teams either move with the times or get left behind. Methods that used to work profitably for traders a year ago as grinding for whitelists in NFT projects no longer works.
Even when NFT projects fail, the experience made by the team is still invaluable in building the next one profitable blockchain dApp. Early adopters and pioneers will learn from their mistakes and be a valuable source of knowledge for others who wish to enter the Web3 space.
