NFT Makers Suddenly Lose A Significant Source Of Income

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The abolition of creator royalties by major NFT collections, marketplaces, and platforms is a developing trend in the NFT industry.

This is the direction DeGods and its affiliated collections y00ts and t00bs moved in when they announced they would be removing their creator royalties from secondary transactions across the three collections. This collective is one of the largest NFT collectives on Solana by floor price (275 SOL, or $8,250) and trading volume (1.4 million SOL, or $42 million). The project’s creators updated the DeGods collection at the time of the announcement to indicate that royalties will decrease from 9.99% to 0%.

Our next experiment. pic.twitter.com/VmoDfXvcyu

— DeGods (@DeGodsNFT) October 9, 2022

Following DeGods’ announcement, Magic Eden, the top Solana NFT marketplace with 77% of the market share by trading volume, declared that it will stop enforcing royalties in favor of optional royalty payments. This implies that secondary buyers of an NFT can decide whether to give the originator royalties.

It’s strange that the statement came out a month after Magic Eden released MetaShield, a tool that locates NFTs listed and traded on exchanges that avoid paying author royalties. In some cases, Magic Eden will obfuscate the pictures of NFTs listed by owners who hadn’t paid the required royalties in the past.

Additional Context

The primary sale of NFTs and ongoing, perpetual royalties from secondary trades are the two main sources of income for NFT developers. Depending on how the market conducts the transaction, royalties are often set at a specific proportion of the NFT price paid by either the buyer or seller. The creators determine the royalty percentage, which is commonly set between 5% and 15%.

A unique breakthrough in the NFT arena, creator royalties allowed project owners and artists to create a new revenue strategy that would sustainably compensate their work over time.

The decentralized NFT exchange Sudoswap, which is built on Ethereum, may have been the first platform to challenge the idea of creator royalties by introducing an automated market maker that fully eliminated royalty payments on secondary trades. The DEX believes it can establish a greater presence among the NFT trader community by eliminating royalties and providing better pricing since Sudoswap caters to active traders and speculators.

In July of this year, the Sudoswap automated market maker began offering NFT trading with fees as low as 0.5%. Comparatively, OpenSea, a rival company, charges a transaction cost of 2.5% in addition to enforcing the creator royalties, bringing the total fee close to 10%. The NFT seller is responsible for covering these costs.

Since its July start, Sudoswap has transacted $65.2 million in total, earned $323,000 in platform fees from its 33,600 customers, and swapped 226,000 NFTs. Leading NFT marketplace OpenSea had done $1.6 billion in total volume over the same time period, with an average of 359,000 monthly active users. Therefore, despite Sudoswap’s attractive value proposition and rapid development since its introduction, customers continue to choose to trade on the market leader OpenSea. It’s possible that this is a result of OpenSea’s already-existing network effects, market dominance, and capacity to draw both novice and expert NFT users.

Even though eliminating royalties might theoretically result in a 10% reduction, which would ideally enhance demand for projects, especially in the current economic context, it seems that DeGod’s announcement has had the opposite impact. The DeGods floor price was 390 SOL ($11,700 at the time of writing) before the announcement. The DeGods floor price dropped 36% on October 9, the day the announcement was made, to a low of 250 SOL ($7,500), and it has subsequently risen to 275 SOL ($8,250) today. The switch to zero royalties for the collection was obviously unwelcome by the market, raising concerns about how the project’s creators would continue to be dedicated to growing the project over time.

There is an old adage that says “Show me the incentive and I’ll show you the outcome.” According to Haseeb Qureshi, managing partner at Dragonfly Capital, “this is the iron law of cryptocurrency: unless you have a way to enforce something, competitive dynamics will drive it to get forked out. “Royalties are exactly going through this right now. People will create and test out new models that are ultimately incentive-compatible, so it’s not the end of the road.

Major Statistic

The average NFT developer traditionally received 92% of their earnings through primary sales and 8% through royalties on secondary transactions, according to Magic Eden co-founder Zhuoxun Yin. This illustrates how the majority of artists’ and creators’ income is currently generated by primary sales.

Perspective and Implications

NFT creators, collectors, and supporters are questioning how projects can finance themselves and provide incentives for founders’ ongoing engagement and commitment in the future due to the industry-wide shift away from royalties.

The founders and developers of NFT projects will need to come up with more innovative ways to commercialize their work if the market structure shifts in favor of completely abolishing royalties. To make up for the loss in royalties income, the market can experience more primary decreases. Additionally, producers might try to charge for extra services like subscriptions, goods, and events that would often be paid for through royalties. On NFTs that are offered on secondary markets without receiving any royalties, creators might also try to restrict commercial, copyright, trademark, and other intellectual property rights.

In order to commercialize their work, authors might also be encouraged to hold back a larger portion of the NFT collection’s supply. They may also decide to fractionalize their labor and keep a portion of the token supply signifying ownership of high-value and uncommon one-of-one projects. These systems don’t offer a sustainable recurring income stream, treating remuneration as equity instead.

On the other hand, developers are working diligently on new token standards that aim to impose royalties at the level of smart contracts. The objectives of two Ethereum Improvement Proposals, EIP-2891 and EIP-4910, are to automatically process royalty payments among all NFT marketplaces and ecosystem players, preventing traders and central authorities from evading the royalties that artists are lawfully entitled to.

Even if these suggestions are successful, NFT marketplaces, platforms, and players would still need to voluntarily embrace and apply these token standards. This would necessitate more market acceptance of the value of royalties and a desire to give creator compensation precedence above trader compensation.

Time to Decide

Investors and collectors must assess projects individually regardless of the course royalties ultimately take. Even while royalties might be reduced or eliminated entirely, Web3 technologies and tokenization will enable new economic models that will benefit the ecosystem as a whole.

Recently, professional traders-focused NFT marketplace Blur opened its trading platform Wednesday, and it might offer a workable compromise. Incentivize traders to honor royalties by rewarding them with the $BLUR token instead of enforcing royalty payments, as is the case with the marketplace’s incentive-based royalties.

For the initiative to be successful, creators must still show that they are dedicated to offering lasting value to their communities. Before releasing NFTs for purchase, producers must show that they are engaged in the Web3 community and have the skills necessary to use their distribution networks to increase engagement and highlight the importance of their work. To earn the trust of the larger Web3 community, they must effectively articulate their project roadmap and consistently keep their commitments.

The Web2 world has taught us that users and followers will follow their favorite talent because creators are a limited resource. Because of this, Spotify paid Joe Rogan $200 million to only release podcasts on their service. Nevertheless, creators will observe the larger market for cues, and experimenting in the larger market will lead to a balance that benefits both creators and their fans.

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