NFT Creator Royalties – An Ongoing Battle

Several factors helped the rise of non-fungible tokens to stardom. While some died out over time, many still play an important role in the NFT ecosystem. If you ask many NFT enthusiasts, one of the greatest values ​​of holding an NFT is its financial benefits. That answer may be the same for creators, but in deeper insight there is an essential value – NFT Creator royalties.

With NFTs came a way to protect creators’ intellectual property (IP) like never before. But more importantly, it also allowed them to earn royalties from those IPs. Plus, it allows creators to earn those royalties forever. Exciting, right? It is no wonder that NFTs easily broke into many industries.

Now, royalties for NFT creators are the subject of an ongoing battle. To be or not to be? Good or bad? Remove or keep? It depends on who you ask. It also depends on which platform you choose to explore. Conversations around creators’ royalties shaped the last quarter of 2022 and have entered 2023.

In this article, we explore discussions around creator royalties and what actually happens. Want to find out? You should read to the end.

What are the Creator’s royalties?

Creator’s royalties are kickbacks the original creator of an NFT receives on sales after the primary sale. These royalties are enforced with mechanisms coded into the smart contract of the NFT. Likewise, NFT marketplaces, where the works are also minted and listed, play an important role in whether royalties are applied to a sale.

Royalties are usually set at 2-10% of a sale and are perpetual. For many creators, royalties are a way to earn passive income, sometimes even surpassing what they earn from primary sales. This situation is more applicable to new artists who do not have a massive following or an active community.

For example, early in his career digital artist XCOPY sold several of his digital pieces for hundreds of dollars. But the pieces accumulated value, and many collectors sold them for much more than they paid at primary sale. Because of the royalties attached, XCOPY made more money from those royalties than he did from primary sales.

For context, if an NFT piece is listed for $50,000 with a 1% royalty, the collector will cover the transaction fees and pay $500 in royalties. While this example may seem significant, think of it in terms of trades in the range of a million or more. Furthermore, most of these royalties are paid forever, meaning that if the NFT is sold 100 times, the creator gets royalties all those times, whether the NFT is sold at a loss or a profit.

A battle between marketplaces

Royalties are more complex than you might think, in fact its application in any NFT trade depends on many factors. To enable the royalty kickback, it must have been programmed into the smart contract, but the smart contract cannot distinguish when an NFT is sold or simply transferred to another wallet, perhaps the collector’s. As a result, NFT smart contracts rely on third-party platforms – namely NFT marketplaces – to execute royalty payments.

Until 2022, royalties were a constant on most platforms, with most NFT enthusiasts supporting them, but the market started to change. Sudoswap was one of the first platforms to oppose creator royalties. Not surprisingly, the peer-to-peer market grew in popularity and had a moderate trading volume. However, other platforms such as X2Y2 took a cautious path, allowing collectors to either honor or disregard royalties.

That introduction to the market brought back arguments about royalties. Similar to the conversation about tools, the question of whether royalties should be charged was in view of the inconvenience it caused collectors, but on the other hand, marketplaces were honor bound to protect the interests of the NFT creators.

A representative from Solana-based marketplace Magic Eden said in November 2022 that the move to a royalty-free model was intended to address “collectors’ needs for low-cost NFT trades.” Several other markets followed to stay competitive.

That battle entered 2023 and grew into a marketplace rivalry between Open sea and Blur. Blur was one of the newcomers, giving more freedom and power to the collectors with reduced transaction fees and a voluntary royalty system. By 2022, Opensea had become hostile to platforms that make royalties optional and had blocked them from being listed on the platform. According to Opensea, creators’ rights are still important and should be protected.

However, Opensea changed its stance when Blur rose as an unexpected rival towards the end of 2022. By February 2023, Opensea had reduced the transaction fee to zero and made royalties optional. According to Opensea, data showed that users were more willing to trade on platforms with reduced transaction fees and optional royalties. It then became a battle whether they should protect the collectors or save their own business. The latter won at the end of the day.

What do NFT creators think?

The most important question in all of this is what NFT creators think about the changing tides of royalties. The feature that once benefited them is at risk of being eliminated, and as expected, they have been vocal against the sudden increase in optional royalties and the challenges it poses to them.

Deadfellaz co-founder Betty is one of the most vocal on this issue. According to her, the issue of optional royalties was something digital artists expected to happen, and creators had to prepare for it. Similarly, Dom Hofmann, co-founder of Vine and NFT projects Loot and Blitmap, described the issue of optional royalties as “a boring mechanical debate and an interesting cultural one.”

However, the concern may vary for creators of 1-of-1 NFTs, if any at all. Unlike digital PFP artists, 1-of-1 NFT creators rarely expect royalties from secondary resale. So for them, they can be less concerned about whether royalties apply or not.

What is the future of royalties?

There are many sides to the divide, many perspectives to see it from, and many interests to look after. From the collector’s perspective, royalties are a burden that many would rather avoid. Perhaps they were more receptive in the early days of the NFT market, but many will reach out. However, it’s not just royalties that collectors want removed; transaction costs are also on the list, and marketplaces quickly adapt to these wishes.

NFT marketplaces have tilted towards the side of the collectors rather than the creators as the varying interests create a conflict of politics. However, the marketplaces remain in a difficult position; impose royalties, and face backlash from the collecting community, make them optional, and face likely exits from creators on their platforms. Not only that, but the marketplaces must also protect their interests against competing interests. The rise of fierce competitors forced many marketplaces to abandon their long-held policies.

The struggle remains the same for creators, the removal of royalties has many serious consequences for the artists, collectors and the Web3 community. Without royalties, artists may be forced to release NFTs more frequently, which could oversaturate the market, reduce value, and make them undesirable to collectors. Creators may also be forced to seek out new marketplaces where royalties are allowed and hope the tides rise and fall in their favor.

Last word

Many people blame no or optional royalties for the prolonged downturn, which wiped billions off the market and crippled the NFT ecosystem. With so many losses, collectors began to prioritize profits and flocked to platforms without transaction fees and optional royalties.

As the marketplace-creator-collector war continues, many NFT projects have moved to creator-centric platforms like Manifold. The platform provides code-free embossing and has a customizable smart contract model that supports royalties, thus protecting the creator.

Instead of banning royalties, many platforms will make them optional and leave the decision up to collectors, leaving the choice to honor or reject royalties a matter of morality. Collectors looking for profit will most likely reject them, but those in tune with the ecosystem and its ethos may choose to honor them.

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*All investment/financial opinions expressed by NFT Plazas are from personal research and experience of our site moderators and are intended as educational material only. Individuals are required to research all products before making any type of investment.