Artists Say NFT Markets Is Betraying Web3 By Nixing Royalty Payments

On a hot and humid Tuesday evening, collectors flocked to a bustling art gallery in Lower Manhattan. It was their only opportunity to capture a physical copy from Justin Aversano’s “Cognition,” a series of 364 mixed media that the grieving artist created in 2014 after the death of his mother.

Sitting in a back room away from the crowd, the DJ and the gallery staff, Aversano explained how he had come to crypto.

Paradigm shift

“I think what got me into NFTs in the first place was the fact that royalties were a thing, and this technology pushed it forward for artists to be able to be sustainable off of royalties,” Aversano said. “It’s a paradigm shift.”

Artists have long relied on royalty payments from secondary sales of their work to make a living. In industries dominated by studios and publishers and agents and talent managers, it’s been a struggle. Stories are legion of artists forced to seek redress through lawsuits.

The advent of non-fungible tokens promised to give artists a handy digital tool to collect their dues with little fuss. Thanks to smart contracts, creators could now expect to receive regular and reliable payments for their craft far more seamlessly than before. After all, that is the main purpose of blockchain technology – to remove middlemen and friction and make transactions more efficient.

But now this business model may be at risk, casting doubt on one of the core themes of web3 – creative freedom empowered by crypto.

Tip jar

On August 26, the NFT marketplace X2Y2 performed royalty payments optionalcites competition from the fast-growing royalty-free competitor Sudoswap. No surprise, the number of buyers on the site that pay full royalty the following week fell to 88% from 96%, according to X2Y2.

Artists pushed back, and X2Y2 partially reversed course. But the move stumped creators who realized royalty payments were less of a paradigm shift than glorified tip jar.

“If this becomes the trend, I’m out of web3,” Amber Vittoria, a New York-based artist, tweeted. “Ignoring a creator’s royalties isn’t innovative, it’s regressive.”

Aversano isn’t the only artist to embrace the promise of NFT-backed royalties. At a September 2nd panel discussion hosted by X2Y2, several artists spoke about how important royalties were in attracting them and their peers to blockchain technology.

“Every culturally significant person that I know who is on the fence about this room has said that the only thing that fascinates them is the fact that they get royalties,” said Pat Dimitri, a musician. “And that it seems like artists are actually being fairly compensated for their output for the first time, maybe ever.”

But there is a problem: royalty payments are easily circumvented.

NFTs are smart contracts, and within each NFT, artists put in what their royalty percentage should be, Wacky Chainer, the pseudonymous director of business development at X2Y2, told The Defiant.

‘Call it goodwill’

But these contracts do not automate the collection and distribution of royalty payments.

“There’s always been — I wouldn’t call it benevolence, but there was an understanding that marketplaces would collect those royalties for creators and redistribute them,” he added.

In the race to build volume from collectors in a bear market, marketplaces are now under pressure to drop royalties.

Fee-free NFT marketplace Sudoswap was launched on July 9. Two months later, it is the fourth most popular platform for buying and selling NFTs, according to NFT data platform NFTGO.

Lower trading fees

OpenSea remains at the top of the market, but its share has fallen this year amid the rise of Sudoswap and X2Y2, both of which charge lower trading fees. X2Y2, which went public in February, earns $9.1 million in daily volume compared to about $15 million on OpenSea, according to DappRadar.

With Sudoswap hot on its heels, X2Y2 announced on August 26 that it would let buyers decide whether to pay artist royalties. The decision was spurred on, in part by Sudoswap joining the list of marketplaces on NFT aggregator Gem, which allows buyers to compare prices across different platforms. Gem was acquired by OpenSea earlier this year.

“You already had other marketplaces that do 0% [royalties]it’s just that they weren’t as popular,” Wacky said.

Gem developer Vasa has said the platform will provide buyers option of paying royalties on NFTs purchased from Sudoswap, although he did not provide one timeline for the implementation.

After outcry from artists, X2Y2 turned and announced that they would reinstate mandatory royalty payments for smaller NFT collections and allow the owners of artworks from larger collections to decide among themselves, via majority vote, whether to enforce royalty payments.

Still, the experience was a wake-up call, according to artists who participated in the panel hosted by X2Y2 on September 2.

Dylan Shub, the founder of the Fat Cats NFT collection, said artists had been duped by marketplaces that had courted them without explaining how NFT royalty payments work. Mr0, a pseudonymous developer at crypto firm QuantumTECH, agreed.

“The marketplaces mostly knew this,” Mr0 told the panel. “But they had a supply problem with onboarding a ton of artists in the space, so you have to start selling dreams at that point. Royalties and all that was really just a marketing mechanism.”

Participants agreed that there was little that could be done technologically to enforce royalty payments. Mr0 said it would simply begin a “game of cat and mouse.” Some said the most likely way forward was to make it a cultural expectation, like tipping at restaurants.

Ingrained in the culture

“When you go to a restaurant, we all think someone is an asshole if they don’t tip the waiter or waitress, right? We have incorporated it as part of our culture,” said Shub. “If we can cultivate a culture where people feel part of the community and want to pay royalties because it’s a good feeling, you know, that’s really helpful.”

Musician Dimitri said shaming people into doing the “right thing” could work. But it would sort of replicate the system he had hoped NFTs would replace.

“I can tell you honestly, in 10 years in the music business in Web2, I’ve had to fight tooth and nail to get paid many times,” he said. “And I’d rather not continue to do that. Web3 was hopefully … a way to avoid having to fight people for the money I’ve earned.”

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Some artists have discussed blacklisting marketplaces that allow buyers to bypass royalty payments, Wacky told The Defiant. DeGods, the team behind a popular NFT collection on the Solana blockchain, has said that buyers who refuse to pay royalties will not be entitled to benefits that come with ownership of a DeGod NFT, such as future airdrops.

“This whole war royal is going to change the NFT landscape,” Wacky predicted. It can affect the artists’ livelihood. Or it could “create a number of very competitive creators,” who work hard to cultivate “very reliable and loyal customers” willing to pay royalties, elevating the NFT’s art landscape.

Buck Flipping NFTs

Standing outside the Manhattan gallery Tuesday night, the pseudonymous NFT collector ThePregnantChad held one of the 364 pieces in “Cognition,” which was carefully wrapped to protect it from the rain.

He entered the market in February to make money flipping NFTs, and found them beautiful. He now collects them for aesthetic pleasure, and is happy to pay royalties – to “real, fine artists”.

“If you jump into the space and want to move a lot of pieces and you want to build a lot of revenue quickly or whatever the case may be, more power to you, but then I’m not looking to support those royalties,” he said.

“But as an artist, you know, someone like Justin Aversano, or someone like Process Gray … yeah, those people deserve royalties. Like that’s why we’re getting the beauty, the beauty we’re getting right now. And I love that part about the blockchain . I don’t want to change that.”