“Andi, what do you think of creator royalties?”
“Wdym? I love creator royalties. Only reason we’re alive.”
Andi is an artist and the owner of Friendly Frogs. She’s right: creator royalties are the lifeblood of NFTs. Without it, mass adoption wouldn't be a reality. “One of the most important drivers of NFT adoption is their ability to guarantee value flows back to the creators without a middleman via royalties. Cutting that out goes against the ethos of the industry and undermines arguably the most important innovation provided by NFTs - verifiable digital property rights,” shares Joe Doll, General Counsel at Magic Eden.
NFTs present a unique and welcomed alternative to the traditional art market. Through creator royalties, creators have a constant flow of liquidity. On top of initial mint revenue, each sale carries a % of creator royalties which is usually added to the community/treasury wallet.
How creator royalties work in practice:
- The relevant smart contract enables creator royalties to be executed automatically.
- Marketplaces with the relevant NFTs enforce them whenever a secondary sale is conducted.
- On Magic Eden, we display the royalty amount and include this concept in our terms of service so that sellers and buyers are aware.
Creator royalties encourage and incentivize continued growth and new ideas. In a fast-developing and nascent space, this is crucial for continued and future development. Besides smart contracts, there’s a shared (unspoken) social contract which implies royalties are to be respected. For many collections, royalties are how they fund their NFT ecosystem. They’re a legitimate stream of revenue and their prevalence has grown over this year. Not all collections should or will be able to provide a service in exchange for funding. What will happen to art for art’s sake?
But, what about digital ownership? On the buyer and seller side, what you mint is yours. What you choose to do with your NFT is your choice, but there are consequences. Both buyers and sellers are 50-50 responsible for opting for 0% creator royalties, because they both know which conditions they’re trading and transacting in — knowingly buying without royalties in order to pay less. In the spirit of web3, projects shouldn’t try to exert control unless they want to follow in the footsteps of big tech.
There needs to be a balance. If collections are stifled by a lack of funds, it impedes innovation and development. This isn’t a win for collectors or traders — the value of the collection would go to zero if building stops. Apparently, recent DeGods sales saw more than 66% of DeGods sold OTC (over-the-counter). Unlike a marketplace such as ours, the creator is unable to continue reaping the benefits of their creative work.
“Stripping creators of royalties puts into question the many use cases for NFTs that are dependent on royalties, whether it’s ticketing, fine art, or something else. It’s backwards and impedes NFTs reaching mass adoption,” - @theophana
As we’ve seen over the past two years, NFTs are a force of culture and our marketplace is more than an orderbook. The many use cases of NFTs will usher in mainstream adoption and those use cases are only possible because of creator royalties.
For example —
- Collection 1 uses royalties to generously remunerate their staff. Without creator royalties, they would not be paid an adequate salary.
- Collection 2 has a DAO and royalties are used to fund community-led efforts. Without creator royalties, it stifles innovation and fails to incentivize their community and development.
- Collection 3 runs an RPC service and uses royalties to fund their ecosystem. Without creator royalties, they would be forced to reduce their free RPC network to match.
- Collection 4 is a fine artist who uses creator royalties to compensate themselves for their work. No royalties = no compensation.
So what can projects do? It’s a discussion for the broader ecosystem — perhaps on an NFT token standard level or a marketplace level. Technologically speaking, this is the next evolution. Perhaps, this shows a gap and opportunity in Solana’s technology. When Solana first launched, the hope was that it would be a place for DeFi. But jpegs of monkes prevailed and dominated. Current bear market conditions only accelerated this development.
In other asset classes, there’s a concept called “illiquidity premium” which you get if you’re buying an asset that has little liquidity to sell into. That liquidity premium is more than 3% (the average royalty charged). But, more than UI (user interface), trade experience and fees, the primary service provided by a marketplace is liquidity to sellers and inventory to buyers. Presumably, a seller lists their NFT because they need the funds and where better to get liquidity than on Magic Eden? Instead of waiting a couple of days, the volume and liquidity on Magic Eden means that the listed NFT can be bought and sold in seconds. Plus, OTC trades require a more hands-on approach by scouring Discord (for example), unlike listing it on a marketplace and forgetting about it.
As for you and I, we’re part of this unfolding development which would shift the very nature of NFTs. So, what do you think of creator royalties?
Thank you for reading,
P.S Feel free to DM me your thoughts & opinions!
