Until NFT Royalty Features Live On-Chain, the web3 label will remain in name only – CryptoMode

Sparking heated debate across social media, NFT royalties have largely commanded November’s crypto news cycle. While NFT traders and collectors clamor for and against the values ​​and rights of web3 artists, many have forgotten the basic tenets of the web3 paradigm that empower users in the first place.

Critical parameters that govern platforms—such as whether or not artists receive royalties on secondary sales of their NFT artwork—are less important than the methods and mechanisms by which those parameters are determined and how they are enforced.

To confirm their commitment to decentralization – that is, on-chain transactions and on-chain governance – web3 NFT marketplaces must ensure that parameters governing NFT royalties are determined by DAOs. Furthermore, they must ensure that all relevant parameters are hard-coded into their protocols via smart contract modules. Otherwise, social governance and trustless architecture are at best enticing labels, and at worst outright deception.

Even in the bear market of 2022, well-established digital artists can make a decent living selling their NFT collections on various web3 marketplaces. In addition to earning revenue for selling artwork up front in what are called “primary sales,” artists also receive a smaller portion of all future exchanges in secondary markets—typically in the ballpark of 5 percent. These fees, called royalties, help stabilize artists’ income streams by providing ongoing income to supplement their otherwise infrequent primary sales from compilation drops.

But in recent months, everything has changed. In August, NFT marketplace X2Y2 began to allow buyers to determine royalty contributions themselves—essentially reducing what was once mandatory creator compensation to an optional gratuity.

14 October, Solana NFT marketplace Magic Eden followedand replaces mandatory royalties with a similar tip-if-you-like model.

In response, content creators from across the web3 space have taken to Twitter to express their disapproval and general displeasure – and rightfully so. Having had the proverbial rug pulled from under their feet, artists are right to feel marginalized and exploited.

But here’s the thing: Throwing the blame in the direction of NFT marketplaces, while satisfying, doesn’t do justice to the bigger problem. Like all organizations in the web3 landscape, NFT marketplaces compete fiercely against each other to grow their platforms and attract new users. On this prerogative, it is easy to reduce fees for second-hand sellers from 5 percent to zero; it puts money back into users’ pockets and costs nothing for the platform. After all, it is in the nature of free markets to drive down costs for consumers via competition.

The question is not whether platforms choose to write off artist fees, but whether they have any power to make such choices in the first place. The most fundamental value proposition of web3 ecosystems is that their protocols are owned, operated and governed by their users. For this principle to remain true in practice, web3 applications must work fully in the chain.

Thus, the problem is that ERC721 and other popular NFT token standards do not support royalties directly via smart contracts. Instead, they rely on centralized marketplaces to respect and enforce royalty policies—all while competing against each other for cost-conscious users.

On November 5, Ethereum NFT marketplace OpenSea published a Twitter thread which outlines their plan to develop “on-chain enforcement tools” that will allegedly allow NFT artists to launch new collections with mandatory creator fees. Looking deeper, OpenSea’s enforcement tools act as a blacklisting mechanism of sorts, allowing artists to block users from trading NFT collections on marketplaces that don’t honor their creator fees. Just a band-aid solution, OpenSea’s enforcement tools can fragment the NFT space and degrade the inclusiveness and interoperability embedded in the web3 paradigm.

Meanwhile, for the landscape of existing NFT collections, NFT marketplaces and NFT traders – and indeed the NFT space at large – there is a strong demand for a blockchain ecosystem where on-chain royalties and other critical parameters governing NFTs can determined by the DAOS and hardcoded directly at the protocol level. Unfortunately, no such features are technically possible on Ethereum or Solana, where the majority of NFTs currently reside.

The clock is ticking. This time the web3 community is no longer alone.

While the web3 NFT community argues and debates the nuances of artist royalties, the web2 incumbent is quickly approaching with its own centralized options. Tech giant Apple recently announced that it will now allow NFT marketplace applications on the App Store, despite collecting a 30% tax on all transactions. One would hope that, despite their differences and disagreements, the early adopters who make up today’s web3 community can unite against the next iteration of web2 tyranny.

Ultimately, community governance must play an important role in shaping the values ​​of the NFT scene. Soon it will not only be artists, but musicians, gamers, writers, vloggers and other live streamers who will share and monetize their content in the web3 area.

The diversity of voices in the NFT community is poised to grow exponentially. To support their value, community and content verticals in addition to those already existing, DAOs serve an indispensable role as chain mechanisms to organize different community perspectives and fairly curate chain parameters.

To support DAOs, smart contracts act as the only on-chain tools that can fairly and consistently enforce community-determined parameters so that content creators, consumers, and collectors can enjoy an open and free digital content marketplace.

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