“And we’ll never be royalty” if NFT royalty is optional | Ingram Yuzek Gainen Carroll & Bertolotti, LLP
When NFTs first entered the mainstream in early 2021, the ability of artists and creators to receive resale royalties for their works was touted as one of the main features that set NFTs apart from other digital assets. In theory, if coded into the NFT’s smart contract, royalty payments would be paid to the creator of an NFT automatically and in perpetuity whenever the NFT is resold. This feature greatly benefited artists who previously had no effective way to reap any benefit from secondary sales of their physical or digital works. As of last month, Ethereum NFT creators have reportedly been paid a total of $1.8 billion in royalties from secondary sales. While retailers likely haven’t been thrilled to give up a portion of the revenue from a resale, it’s unfathomable that artists would naturally choose to code automatic royalties into their smart contracts.
In practice, however, the payment of royalties to creators has turned out not to be so automatic after all. As my colleague explained in a previous NFT Newsroom post, automatic royalty payments are only effective if the resale takes place on the same platform as the original sale because that platform is where the self-executing smart contract resides. If the NFT were to be resold on another platform, the royalty provision coded into the smart contract would not necessarily be triggered.
Although once touted as a key feature of NFTs, there has been a noticeable shift away from royalties in recent months. Several marketplaces have now officially made the payment of royalties to creators optional – some have even eliminated royalties altogether – with LooksRare, a marketplace on the Ethereum blockchain, among the latest to abandon these mandatory payments. Other platforms that have moved away from supporting mandatory royalties include Sudoswap and X2Y2, also on the Ethereum blockchain. A few weeks ago, Magic Eden, the top marketplace on the Solana blockchain, also made the jump to an optional royalty model.
This recent trend away from automatic, mandatory royalty payments begs the question: what can be done to protect creators, many of whom may have been lured into the NFT world by the very promise of resale royalties? A few of these “royalty-free” platforms have built some form of protection into their new models. For example, LooksRare has announced that 25% of protocol fees, which are essentially transaction fees already charged to merchants, will be shared with creators instead of royalties. At Magic Eden and X2Y2, instead of eliminating royalties altogether, which were traditionally paid out of the seller’s earnings, buyers will have the option to set a royalty fee at checkout if they choose to do so. On these platforms, creators hoping to receive royalty payments must simply rely on the goodwill of buyers or, in the case of LooksRare, settle for a share of the protocol fees that is far less than the royalty percentage typically encoded into smart contracts.
So, is there anything more creators can do to increase their chances of receiving royalties for resale now that marketplaces are increasingly choosing not to support mandatory royalties? It remains to be seen. However, NFT artists and creators may consider including resale royalty provisions in the terms and conditions for the sale of their NFTs, rather than relying solely on the smart contract. While these terms and conditions still come with their own set of questions – whether and how they can be made binding on future buyers and resellers, and if so who will be responsible for collecting and disbursing royalties, resellers or the platforms that facilitate the sale – incorporating royalty fee provisions into the terms of sale of an NFT puts a greater degree of control back into the hands of creators.
