Creators Caught in the Middle as NFT Platforms Pursue Opposing Royalty Models

Remember when NFTs were heralded as a new dawn for artists? Yeah, about that. 

Non-fungible tokens representing ownership of art and other commodities were once hailed as a game-changer for creators, who stood to earn perpetual royalty fees from resales due to rules coded into smart contracts. But like most ideas that sound too good to be true, the reality was rather different.

NFT royalties have proven to be virtually unenforceable on-chain, meaning administration falls to the discretion of NFT marketplaces where creators list their work. Flying in the face of bold early promises and indeed the core philosophy of decentralization, some marketplaces have let buyers evade paying creator-set royalties altogether.

A Royal Ruse

Last month, OpenSea wrestled with the issue of business models for NFT creators in a lengthy twitter thread, indicating that it was busy building tools it hoped would balance the scales by “putting more power in creators’ hands to control their business model.” However, the platform has since pushed back the deadline by which NFT projects must use its Operator Filter tool to ensure royalties are enforced.

There is, of course, a wider reality to reckon with here: sales of NFTs have plummeted in the bull market, with the consequence that traders are desperate to pocket profits on NFT resales wherever they can find them. This has motivated multiple platforms to adopt royalty-optional models, meaning buyers themselves can decide whether to pay NFT creators the typical 3-10% on the retail price. Naturally, the vast majority demur.

Although some NFT marketplaces have given NFT creators a share of protocol fees instead, the optional-royalty model has understandably infuriated artists who bought into the idea that they could earn a passive income from future sales of their work. “Despite what we’ve been told over and over again by those who thought NFTs were a revolution for artists, blockchain contracts do not automatically enforce royalty payments," writes Heidi MacDonald in The Beat. 

Art curator Sofia Garcia, meanwhile, calls OpenSea's approach to NFT royalties “short-sighted, coercive, and the antithesis to a movement you've been a part of since the beginning.”

Why is this happening? In a word, competition. NFT sellers keen to earn a bigger slice when offloading a piece of digital art on the secondary market are more likely to list on a platform that doesn’t automatically siphon off a percentage to remunerate the creator. And because blockchain code cannot enforce royalties, there will always be marketplaces that cut them out of the equation.

“Royalty-free marketplaces have grown rapidly,” admits Sara Gherghelas, a blockchain research analyst at DappRadar. “When CryptoPunks appeared in 2017, they could only be bought or sold on Larva Labs’ marketplace. Today, Yuga Labs and RTFKT are creating their own marketplaces. In the event that royalties are no longer guaranteed, some collections may be forced to implement subscription-based business models in order to sustain predictable income. Of course, the simplest way to compensate for lower royalty revenue is to boost revenue from primary sales – but this method may only work for established NFT ecosystems with a track record of success.”

Boosting revenue from primary sales sounds like a brilliant idea, but bearish market conditions make this an incredibly ambitious endeavor. Indeed, November’s NFT trade volume dropped 17.47% from the previous month, with the dollar value ($546 million) the lowest registered in the whole of 2022. Sales were also down 22.24% from October, as the mushroom cloud caused by FTX’s collapse spread out from the blast site.

myNFT Co-Founder Hugo McDonaugh takes a pragmatic approach to the unfolding story: “Because marketplaces survive based on their volume, many have been forced to seek alternative ways to maintain profitability and therefore anything that can give them a bit more of an edge in this kind of market – including reducing or eliminating royalties – has been considered and introduced by some. In our own case at myNFT, we want to furnish creators with the best variety of possible royalty standards they can use in their own contracts, so that it can be more enforceable and the creator knows exactly what they are implementing and what is possible in terms of the level of enforceability.”

An Ever-Evolving Model

It seems that the crypto scene is braced for yet another ideological battle, with content creators themselves stuck in the middle. But just as competition between markets compel buyers to go where they are rewarded, the same is true for artists. Recently, the Magic Eden marketplace announced its intention to support artists by launching the Open Creator Protocol, which it claims can enforce royalties on Solana NFTs which use the tool. 

Of course, enabling NFT creators to blacklist marketplaces that don't honor royalty fees also means collections become inaccessible to great swathes of the NFT-buying public. It is akin to an author blacklisting many of the world's best-loved book stores.

Brett Welch, VP Product for Photo at Lightricks, sees a parallel between NFT marketplaces and social networks. “This situation with NFT exchange platforms changing the terms of creators' royalty payouts parallels what's been happening with the social media platforms, with their ever-evolving partner ad revenue sharing programs and creator funds. 

“Whether you're talking about Instagram or Magic Eden, audiences are only interested in visiting and transacting if people are posting awesome content. The teams behind the platforms know this, so they're likely to continue changing how they operate so that they can maximize their own profits.”

So are creators simply powerless as marketplaces focus on protecting their bottom line? Welch doesn't think so: “The best way for digital art creators to avoid losing their livelihoods is to minimize dependencies on any one revenue channel, and instead cultivate and eventually own their own audiences as much as possible. Then it doesn't really matter if a platform you're on becomes less viable – you just move on and adjust your channel emphases accordingly.”

The future of NFTs, and particularly the royalty model, continues to evolve – and the pushback from artists and creators against recent policy changes will surely persist. But perhaps there's another thing we ought to keep in mind here: NFTs can always be sold offline or off-market, in which case the artist is in the same boat as a writer whose book is re-sold in a charity shop.

Ultimately, the original promise of royalties in perpetuity has been exposed and creators have had to take their medicine. Going forward, projects that purport to align with the artist will have to work that bit harder to earn their trust.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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