The crypto winter is here – and the NFT artist’s royalties are threatened
When NFT (non-fungible token) sales increased in the spring of 2021, the art world held its breath for a digital cultural shift. While many old dealers, academics and critics rolled their eyes at the notion of strictly virtual art businesses, enterprising artists everywhere rejoiced; NFTs would theoretically secure secondary sales royalties, an opportunity for recurring, passive income that has historically eluded art producers in many jurisdictions. But much has changed since NFT trading’s heyday last year – according to Reuters, sales are down almost 99%, a 15-month low in an already precarious sector, and creators are feeling the pressure.
Axios reported that four separate crypto marketplaces will stop honoring artist royalties, a worrying trend that affects those who first introduced blockchain into the cultural consciousness. Magic Eden and LooksRare in particular have moved to royalty-free models, allowing buyers to decide whether or not to pay creators the usual 3-10% of the resale price for NFTs. The motivation is clear: traders want higher profit margins on NFT resale, and platforms want to retain and reward traders who buy in bulk, a practice that brings a higher price than one-time purchases. This progression has investors speculating whether the NFT bubble is finally ready to burst.
Although NFT creator fees are contracts, blockchain code cannot actually enforce token transfer provisions, making these contracts essentially voluntary. From an operational perspective, royalties were never guaranteed on the blockchain; instead, the documentation of each NFT only asks for a royalty, a procedure that platforms have previously respected under more favorable market conditions.
“There is ZERO way to force royalties technologically”
Artist Mike Winkelmann, better known as Beeple, who famously sold an NFT in March 2021 at Christie’s for $69.3 million (including tax), wrote on Twitter: “There is ZERO way to FORCE royalties technologically,” insisting that creators were to “build a collector base that WILL[s] to honor these royalties”.
Although marketplaces such as LooksRare have tried to compensate for the damage by introducing a 25% cut in the protocol fee to creators, criticism came quickly. NFT artists and watchdog communities like crypto ecosystem Immutable X are naming and shaming royalty-avoidance platforms, amassing blacklists and threatening mass sales. So far, Ethereum market leaders MakersPlace and OpenSea are maintaining their fee-favoring policies; in a public statement, MakersPlace CEO Craig Palmer even declared that the “optional approach” doesn’t fit with his “vision for the space”.
Barriers to flexibility
In November, OpenSea CEO Devin Finzer announced that mandatory creator fees would be enforced for new NFT collections. “We believe creators should have the power to build the collections and communities they want, and buyers and sellers should continue to have the freedom to choose which collections they do and do not engage with,” he wrote in a blog post. Still, the code Ethereum NFT creators can insert into these new collections will necessarily prevent them from being traded on other marketplaces, a hindrance for flexibility-minded sellers.
“This says it all about the ways in which ideologies from Web 2.0 are still in Web 3.0,” says Margaret Murphy, an interdisciplinary artist and community manager for Misa.Art, a Berlin-founded NFT marketplace. “What feels different, though, is the way the artists and creators are pushing back against this.” She adds that not all platforms seem to be plagued by this embittered dynamic between artists and sellers. “In my experience, Tezos is the blockchain that aligns in favor of the artist, unlike Ethereum,” she says. “Perhaps the conversation is really about removing the capitalist motivations behind flipping NFTs on Ethereum that pollute Web 3.0.”
“Perhaps the conversation is really about removing the capitalist motivations behind flipping NFTs on Ethereum that pollute Web 3.0”
Tezos isn’t the only one benefiting from an artist-centric approach. As of October, Cardano NFTs has officially become the third largest NFT trading protocol, in no small part due to its creator-friendly royalty policy. Artists looking to retain royalties have identified Cardano as a viable alternative to the two most popular blockchains – Ethereum, the larger, user-friendly platform, and Solana, the smaller, newer marketplace with faster speeds and lower transaction costs. The spaces that nix creator fees are primarily Solana-backed, but even Ethereum-based policies prevent sellers from trading on other platforms, ultimately undermining the market propensity valued by sellers and creators alike.
The fee-eliminating tendency in NFTs reflects a general trend towards corner-cutting in the cryptosphere. After cryptocurrency exchange Binance.US eliminated fees for spot Bitcoin trading last July, fee compression became a feature of the sector’s trading ethos. While technology-enhanced efficiency can reduce the cost of doing business, it can also represent its own downfall for NFT traders. OpenSea’s commitment to artist royalties may buck broader economic trends, but as a side effect, it may minimize diversification across blockchains.
