The topic this weekend is creator royalties in the NFT space. This topic is very important. I want to share my thoughts and try to talk about why I (and others) are talking about it now. Contrary to popular belief, isn’t it funny because 8liens, or because a bunch of us woke up one day and decided to stop paying artists royalties? It’s because there’s a rapidly growing market (sudoswap) that doesn’t respect creators royalties. We’ve already started talking about this, and it’s important for everyone to understand that there are various forces at work. I will try my best to explain.
First, let me say that creator royalties are one of the cornerstones on which our entire space is built. This is especially true for artists. We must fight to consolidate this culture. The key word here is culture. At the smart contract level, royalties are not enforceable (we will discuss this shortly). In order to pay creator royalties, people have to be willing to pay.
I would also like to say that there are tons of nuances in this. Not all creators are created equal. I know once we start talking about these things it becomes an incredible slippery slope, but in my opinion we are already on this slippery slope and it would be premature to ignore it now. A 1/1 artist is not the same as a team releasing a 10k pfp project, they have a roadmap, they have a high mint price, it is not the same as a VC-backed project. Whether these divisions affect the market’s decision to pay royalties is one thing. The truth is, it has influenced the market’s decisions.
Royalties are not enforceable at the smart contract level
Well, let’s start with the elephant in the room. A very common misconception is that developer royalties are hard-coded into smart contracts and enforced each time an NFT is sold. This is completely wrong. When I first heard about this (around October 2021 when the contract was created for ZenAcademy), I and most people I knew were stunned.
“Wait, what?? Isn’t that what all this is about?”
Yes, kind of like. For artists, one of the biggest selling points of entering the field is that they can earn royalties on their creations forever. Our space has a dirty little secret, this is not done on-chain (in most cases). This is done at the market level. If you sell some NFTs on OpenSea, the OS receives the royalties and sends them to you. They must respect the royalty agreement. We rely on third parties, usually centralized entities, to enforce royalties.
This also relies heavily on creators setting up their creator profile pages on the NFT marketplace and setting their royalties. If they ignore the setup, they won’t get the royalties. There have been some big advances in this area over the past year trying to bring on-chain elements to all of them (i.e. EIP-2891), I think the most notable is that manifest.xyz is doing royalty registration[ 2].
It’s worth noting that creators don’t need to go to various NFT marketplaces to set up royalties, they can include it in a smart contract, and the NFT marketplace can then find and automatically set and honor it. It introduces a standard that is adopted by most mainstream NFT exchange markets, which is a huge improvement.
The crux of the matter, however, is that the NFT marketplace must still agree to abide by it. Creator royalties are not enforceable if someone decides to trade over the counter (over the counter) with others without using the market, and if the market goes “you know what, fuck him, let’s not pay ours” Creator Royalties”, which is also unenforceable. The latter is exactly what sudoswap.xyz decided to do.
You’d think they’d face huge public backlash, and no one would want to use MPs, right? Yes and no. They will certainly face opposition, but never underestimate the greed of people and the aggressiveness of people chasing profit and chasing financial advantage. This situation is exacerbated by a factor of 100 when we consider anonymous transactions.
Image: Dune by 0xRob
For comparison, OpenSea, LooksRare and x2y2 have completed transactions of approximately 8,000 ETH, 2,100 ETH and 1,000 ETH respectively in the past 24 hours (virtual transactions have been excluded):
As such, sudoswap still has a relatively small share of the total NFT market, but it is worrying about the path it appears to be taking.
Let’s take a look at the types of NFT collections people are trading on sudoswap:
Remember when I started talking about the difference between 1/1 art and a larger collection? Basically all trading activity (so far) seems to be done on large collections, whether it’s a PFP program or a membership program . Of course, this is a very nebulous area, because in most cases, there are artists who create artwork for these collections. Some of them are 1/1 artists (Gremplin with Cryptoadz and FVCKRENDER with FVCK_AVATAR// in particular).
Why are people trading these NFTs on sudoswap? It’s hard to tell, but one thing I’m sure about is a correlation between the size of the NFT and the likelihood of traders circumventing creator royalties. I’ll give an example soon, but this brings up another important point:
The difference between a collector and a trader/investor. Yes, many people have both, but many will also consider themselves purely to make money and trade NFTs and have no interest in collecting or supporting artists/creators. As bad as it is, it’s a fact. Ignoring it won’t make the truth go away. These people exist, they are part of the market, and they account for a considerable amount of transaction volume in large collections.
For these people, they go to the places with the lowest fees. They trade at high frequency, look for arbitrage opportunities, and enter/exit projects and positions to maximize profits. This gives sudoswap a competitive advantage over other royalty-respecting marketplaces. As a community we can boycott sudoswap, we can say we hate it, we can refuse to trade there – but it only takes a few people to buck the trend and suddenly there’s a sudoswap NFT trade out there market. When you have 10,000 NFTs in your collection with thousands of unique owners, many of whom are just trying to make money, it’s not hard to see that happening.
Here is an example. Now if I want to buy an Azuki, the minimum price through OpenSea, LooksRare and x2y2 is 7 ETH and there is only one option at that price.
Source: marketplace aggregator Blur.io
Alternatively, I can go to sudoswap, choose from 16 different Azukis, and pay 6.639 ETH, or a “discounted price” of 5.16. As a buyer who only cares about profit, it seems obvious, right?
What about the seller? In this example, they are listed on OpenSea. They pay a 7.5% fee (2.5% OpenSea + 5% creators), so sell their Azuki for 7 ETH and they will get 7 – 0.525 = 6.475 ETH.
In contrast, sudoswap has a 0.5% total fee, and they can take home 6.639 – 0.0332 = 6.606 ETH.
Sellers can buy at a lower price and still earn more.
If they were trading at 7 ETH on x2y2, this would be slightly beneficial for sellers; but this does not take into account the incentives for buyers to be more likely to buy at lower price points.
All of this should be emphasized that there is a huge spread, and when you can eliminate the 2.5-10% creator royalties, there is a huge financial incentive for traders to trade on the market without paying any fees .
We can shout blue-faced and beseech the “market” not to use sudoswap, but sudoswap has seen significant activity and I really don’t think it’s going to slow down. Traders are ruthless. Anonymous traders and bots are more lethal.
There’s also a big question about transferring stolen assets here. I actually don’t know if sudoswap handles stolen items, or how, but it’s something to be aware of and a reason to be extra careful if buying there.
So, what should we do?
That’s the difference between a collector and a trader, and the difference in the size of the collection. beeple summed it up very succinctly earlier today:
In general, as a community, we have decided to respect creator royalties. I believe this is especially true for 1/1 artists, but also for generative artists and individual creators who are not part of large teams. Most collectors who buy NFT art are more than willing to support the artist and pay royalties. This is also what we want. There are countless over-the-counter transactions of high-value assets, and even if the transaction does not go through the NFT marketplace, the seller will contact the artist and pay them royalties. This happens a lot with art blocks, for example.
This is a cultural issue. It’s a social contract. We, the holders of NFTs, choose to pay our royalties. We choose to use a marketplace that supports them. We must continue to advocate for royalties to creators and pay artists, or we will fail at one of the most beautiful things about web3.
I believe we can maintain that spirit and culture from now until the end of time. I really believe. It’s so ingrained in our community that it’s simply impossible for people to consider not paying artists royalties. I saw a good analogy on Twitter today comparing royalty and tipping culture in the US:
Tipping is not mandatory, nor is it enforced by law. However, this is a social law. The vast majority of people give a nominal/standard tip (I think 15-20% is the norm these days). Yes, there will always be a small group of people who opt out, and for the most part, they are shunned by society and have always been a small group of people.
We need to continue to maintain the web3 culture of paying artists royalties. I think this works for art, collectors and small collections. When it comes to these large 10k roadmap collections, I don’t believe it’s run as a for-profit business.
Why are 10k collections different?
I use “10k” to mean large collections, which can be 4k, 8k, 15k, 50k, 250k. The difference between them is that, at least today, the vast majority of those who buy, hold, sell, and trade these NFTs do so for monetary gain, not for collecting or supporting the creator.
Whether this should be the case is not the point at the moment, whether it will be in the future is another question. The reality is that right now, when a 100k collection mint comes out, a good portion of those mints are looking to reverse and trade in the short term to maximize profits.
A significant portion of this significant percentage are unwilling to abide by the social contract and culture of royalties. This means that in a market that doesn’t respect creator royalties, there will always be some level of transactional demand in these collections.
Again, it kinda sucks, but let’s not bury our heads in the sand and pretend reality is a rose-colored utopia, and with a friendly plea, we’ll get the world’s ruthless merchants to pay their dues.
Incentives are totally abnormal
All of this also highlights a huge problem with the entire pattern of creator royalties for these larger collections, especially those with roadmaps. It is in their financial interest to increase secondary market activity. High volume = more profit. Such incentives are crazy.
Why do you think all of these items have a “delayed disclosure” period? Sometimes it’s to sort out the artwork, or for non-evil reasons. Most of the time, it’s to create hype and generate secondary market activity. When the market finds a “pre-disclosed” price, there is a lot of speculation and trading. Then disclosure happens, and as prices (usually) drop, the market finds a “post-disclosure” price, and there’s a flurry of further activity. Collectors collect, traders trade, speculators speculate, gamblers gamble, and the project side loves it all the time and takes a commission from every trade.
It’s also good for a project if they announce anything that affects the reserve price. It doesn’t matter if it goes up or down, what matters is that there is activity. Even better, if they can announce something to lower the floor price, and then announce something a few weeks later to boost the floor price. I’m not saying that all, most, or many projects are actively and intentionally doing so – but there is definitely a financial incentive (in the short term).
Keep silent and let your community guess and guess. Some will give up and sell/leave, others will buy hoping for a big announcement to drive up the floor. The more vague and abstract your commitments, the better. Great for projects, but less than ideal for collectors/consumers/token holders.
Why are projects incentivized to change their holder base? Shouldn’t the incentives be aligned so that long-term holding is the best outcome for all participants?
I understand it’s good for a project to get ongoing royalties to pay for maintenance and allow them to create something for the benefit of the entire community. I don’t think this is a thing that should “go away”, but I just think the whole system has some flaws.
It’s also a blow to those who have to pay more royalties by selling projects they’ve lost confidence and funding for. I’m not advocating that anyone should bypass royalties just because they’re losing money on a trade, but what I’m saying is that people are more likely to do so.
When incentives aren’t working right, when people are no longer willing to pay royalties, that’s what we do on sudoswap. Note again that basically all of the activity so far has been for these larger collections, not for 1/1 of the artwork. The reality is that people want to support artists and pay their royalties. For these larger collections, the collective desire is less obvious.
Beeple’s words are worth quoting twice.
Building a collector base out of a $10,000 collection is impractical when everyone expects royalties. it is just. I’m very sorry. There are always people who want to bypass them and “cheat the system”. As the size of the collection increases, so does the likelihood of such a group of people.
A good barometer we can refer to might be XCOPY. I can imagine all his 1/1 collectors going to great lengths to cash out any royalties they might sell. With his MAX PAIN AND FRENS collection of 7,469 pieces, I’m not so confident that all 4,178 holders will pay royalties.
So, how do we do it?
There’s still a lot to think about and sort through. I think every current and future project founder and collector needs to think positively about this. There are countless different “solutions” and approaches to better align incentives, and I hope we’ll see more exploration and experimentation to see what works and what doesn’t.
The “LarvaLabs Model” is an interesting model. They set aside 10% of the supply (1000 NFTs) and feature the series with 0 royalties. Over time, they sold about 500, and then when they were acquired by Yuga Labs, the remaining 500 were also sold as part of the deal. More recently, 8liens has adopted the same model. This is an interesting question.
This means that in order to be profitable, you have to sell tokens in the future. The most common response to this is “Oh, won’t the team sell tokens below the floor?” If they go out and put 100 NFTs, that’s definitely going to happen. There are a lot smarter ways to do this though – sell more slowly; sell through auctions with a minimum 15% discount to those who will bring value to your project/ecosystem.
Still, there are plenty of questions – what if the price never rises enough to sell? Then you may not make much money. This is when you might want to consider a higher initial mint price. This is also a problem, because again we’d be wrongly adjusting the incentives to give founders all this up-front capital in the hope that they’ll bring value later. So what about free mint? Sure, it works, but suddenly VCs and those with deep pockets have a huge advantage in launching and backing an amazing project without taking any mint proceeds or Secondary sales proceeds in lieu of future profits.
This is a tricky question.
Another popular option is subscription-based NFTs. Sell ”Access” or “Utility” NFTs for one month, one year, 3 years. This works better for SAAS programs and membership clubs, but not so clean for PFPs going the IP route.
Vitalik seems to think Harberger’s tax is fine:
Of course, gigabrain was thinking about this more than a year ago and posted about it on reddit. Harberger tax is similar to property tax, you pay a monthly/yearly “fee” to keep your NFTs. If you don’t pay, you lose it. It has its own problems and seems completely infeasible for many types of projects.
For founders, though, this is another potential tool.
There is a RTFKT model for web2 companies where they state in their T&Cs that you have to pay royalties:
This caused a great response at the time. Now, I’m wondering if there’s been a shift in people’s mood, where people are thinking “well, maybe getting people to legally agree to pay royalties isn’t that bad?”
IIRC Murakami has something in their T&C that under certain circumstances they can “build” the artwork and have the markup point to a blank page or something. Not very decentralized, but there are definitely centralized options that you can try and implement to register to track royalty payments and “cancel” NFTs that don’t honor them. In the view of the IMO, this is extremely impractical and unworkable.
We are seeing more and more projects emerge with their own NFT marketplaces. If you can create a marketplace that offers a better service and experience than standard NFT exchange marketplaces or aggregators, that’s one way to get people to use it. Maybe you can take advantage of some incentives.
Another interesting idea is that royalties change over time. If one holds an asset longer, what about the royalty %? Or is it better to lower the reserve price as much as possible? There is a lot of room for experimentation.
Ultimately, there is no one-size-fits-all approach.
The most important thing you can do as a creator is make people willing to pay royalties.
Why do people want to pay royalties? Supported creators. Support the founders and their vision and roadmap. In order to maintain a culture and temperament, that is to find a better mode than the traditional web2, web1, web0 mode.
Tell your friends to pay their royalties. Tell your friends to support artists and creators. Whether it’s an individual artist or a 10,000 collection, we should all encourage respect for royalties.
As a project founder, please consider other revenue models for your business. At this point, I think it would be very irresponsible to rely only on secondary market royalties forever. Even if you can make sure 100% of your NFT sales are done in a way that returns the royalties to you, there will still be a long NFT winter and bear market where trading volume will be very low for a long time, if your only If your source of income is secondary market sales (or hoping to drop another series), things are going to get really tight.
Wait, can’t we code this into a smart contract? What should developers do?
I mean, I’m not a developer, but if it was possible, it should have been done by now. The reality is that you cannot encode royalties into a smart contract without other major flaws. I’m hoping someone much smarter than me comes up with a really creative and innovative solution to this problem at the smart contract level, but I’m pretty sure it hasn’t been solved yet except for the Harberger tax version.
Hopefully someone can tell me with Cunningham’s Law, although I’m not optimistic.
I’ve only scratched the surface on this topic. For the most part, I just shared some facts, raised some topics and points, but didn’t have any real solutions. I hope anyone reading this will think more deeply about the spaces and relationships between creators, royalties, collectors, traders, speculators, and teams.
For 1 in 1 artists, different royalties and incentives are also worth considering. I carried the assumption from start to finish that maintaining the status quo is the best thing we can do. That’s great, but maybe there’s room for more innovation. Are artists currently best motivated and rewarded for their creations? Should royalties be paid in perpetuity, or is 100 years more reasonable? Is the 10% “standard” “good enough” for artists, or is it for everyone All the best? Would 20% be better?
Is there a difference between an artist releasing 1 work a year versus 1500 a year?
This topic of debate will go on for a long time. I want us to keep going, not going backwards. We have the tools to create a better world. It’s never going to be perfect, but at least let’s make sure it’s better than anything before.
 https://www.manifold.xyz https://royaltyregistry.xyz/lookup https://sudoswap.xyz/#/ https://opensea.io/collection/max-pain-and-frens-by-xcopy
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/viewpoint-web3s-culture-of-paying-royalties-to-nft-artists-should-continue-to-be-maintained/
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