The race to the bottom on NFT royalties

jpetrich.eth

If you pay any attention to the web3 landscape, you may have seen commotion recently about royalties. One of the most attractive things about NFTs for creators is the expectation that the creator of an NFT collection receives royalties on all sales of the NFT. Whereas in the traditional art world it’s impossible for an artist to monetize the increase in value of their older works, with NFTs, an artist’s earnings continue with each secondary sale, and are set at a percentage of the sale price.

But how do NFT royalties work? While there is a standard for defining royalties, its implementation is unenforceable from the point of view of the creator. This is because trading of NFTs is done through marketplace contracts like OpenSea’s Seaport. In practice, this means that royalties are set up with each marketplace separately, and creators trust the marketplaces to enforce royalties on each transaction. Collectors put up with this until recently, because OpenSea is the dominant NFT marketplace and respects royalties. However, newer marketplaces have realized that royalties are an area of competition, so there has been a race to the bottom, with Magic Eden, X2Y2, and Blur making royalties optional for purchasers, and LooksRare reducing royalties to a fixed 2% across the platform, with only a quarter of that going to creators.

While this race to the bottom was inevitable, the question now is how to continue to make NFTs a valuable means of income for creators and artists. Several approaches are being debated across the web3 community, including:

  • Creators should just charge more for the initial mint, or reserve a number of NFTs for themselves to sell later, if their work appreciates in value. This works for new collections, but doesn’t help creators with existing contracts.

  • Royalties should be optional, but someone should track who chooses to honor them, and the community will reward those who pay royalties over time. This is optimistic and doesn’t guarantee any income for creators.

  • Creators should choose to block marketplaces that don’t honor royalties from interacting with their NFT contracts. This will work for future contracts, but seems to be opposed to decentralization, and benefits OpenSea directly unless other marketplaces go back to requiring royalties.

What do you think the best way forward is? Reach out on Farcaster, Twitter, or via email and let me know! I plan on sharing my thoughts in the next few weeks.

#nft#royalties#opensea#web3
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