NFT marketplaces ditching standard royalty fees labeled “short-sighted”

Sales of non-fungible tokens (NFTs) slumped to US$700 million in August from US$4.7 billion in January as buyers pulled out amid the wholesale slump in cryptocurrency prices. One method to try and get them back is to make paying royalties to NFT creators optional. Welcome to the backlash.

Royalty fees give the NFT creator a percentage of the price each time the NFT is sold, but the largest Solana-based NFT marketplace Magic Eden made that optional last week, a move called “short-sighted” by Sean Ryan, chief executive officer of player-focused NFT marketplace AQUA.

The trend will damage creators and the industry in the long term, he said in email comments to Forkast.

“In pursuit of trading volumes, these platforms have lost sight of the critical importance of creators and the very value they bring to marketplaces,” Ryan said. “Without these artists – and compensating them fairly for their work – there wouldn’t be anything to trade in the first place.”

NFTs are seen as central to the development of Web3, or the evolution of a decentralized internet built around blockchain technology and a place where individuals own the rights to their data and their work. Nixing royalties puts that vision at risk, said Salah Zalatimo, chief executive officer of Voice, a digital art marketplace.

“It undermines one of the biggest promises and exciting developments in the creative Web3 space – which was to more fairly compensate artists by providing lifelong royalties,” he said by email, adding, however, that markets are nimble and will adapt to changing circumstances.

“This will create a clearer distinction between the platforms that are built for traders and platforms that are built for artists. An artist will be able to choose which platforms their NFTs will trade on,” he said.

Boring

There have been attempts before to introduce ongoing royalties for artists, such as in the European Union, but in an industry where not all transactions are recorded on the blockchain in perpetuity, this rule can be difficult to enforce.

Ryan said if content creators are no longer receiving royalties, they will seek other opportunities that compensate them more fairly, to the detriment of the NFT industry.

“I can’t think of a more boring ecosystem than one without great content,” he said. “Committing to paying creator royalties is an investment in the folks that keep our industry alive. Great things come when we build together.”

Magic Eden typically controls about 90% of the NFT trading volume on Solana, but had begun losing market share to smaller competitors in recent months, such as Hadeswap and Solanart, who both offered optional royalty payments.

With Magic Eden now doing the same, the overwhelming majority of the NFT trades on the Solana blockchain do not automatically pay royalties to creators. Some users vented their frustration at the move on Twitter.

“This is by far the worst decision you guys could have made,” tweeted one user, Code Monkey, whose profile is listed as a founder of the Solana platform, NodeMonkeyNFT.

“Creators/founders stuck by you through thick and thin. This will send projects to zero and disincentivize new project growth. Consider building a method to enforce royalties rather than giving in,” the tweet said.

Open Sea

However, it is a slightly different story on Ethereum — by far the largest blockchain for trading NFTs — which is in turn dominated by the world’s largest NFT marketplace, OpenSea. The site still offers royalty payments as standard, not optional.

OpenSea reported sales for the past 30 days of more than US$320 million, which is almost 4.5 times that of its nearest rival on Ethereum, X2Y2. However, much like on Solana, smaller marketplaces are nipping at its heels by offering other pricing structures.

X2Y2 said in late August they were introducing a feature where buyers could set their own royalty fee, acknowledging the debate over the issue, but also noting that a 0% fee becoming the norm is not the best for the industry.

“We will be working w/ market participants from all sides to ensure it doesn’t become the norm as it is up to us, collectively as an industry, to set the right standards & pave the way for the future of the NFT space,” the marketplace said via Twitter in announcing the move.

Similarly, decentralized exchange Sudoswap has exploded in popularity in recent months as it offers royalty-free trading, growing from under US$300,000 to over US$3.3 million in total value locked over the course of August, according to DeFiLlama.

Voice’s Zalatimo said it’s difficult to predict what percentage of users would forgo paying the creator royalties on any platform, but he said the majority of traders on large platforms are not in it to support the artists, and will choose to keep the royalty fee themselves.

“It’s a clear signal from platforms who are built for trading, not collecting. They see speculators and asset-holders as their target audience, rather than artists,” he said.

As the NFT market looks poised to record its sixth straight month of declines in secondary sales, AQUA’s Ryan said this is a make or break time for many of the companies involved.

“Now is the time for NFT platforms to differentiate themselves from their competitors and stake their claim in the community,” he said. “That goal can only be accomplished through meeting the demands of users while also ensuring that creators’ needs are satisfied, which can be a tricky balance to strike. I anticipate that many of the companies that make it through this bear market will become the household names of tomorrow.”

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