Here’s what you need to know about the NFT Creator Royalty Debate

Creator royalties have been a prominent facet of the NFT market for years. Even in the early days of the Web3 creative economy, artists of all persuasions could sustain themselves through a mix of income from primary sales and returns received via secondary market royalties.

Yet while royalties for creators seem crucial, they are not hard-coded into the market – much less individual smart contracts. Creator royalties, sometimes called creator fees, are optional and implemented only to reserve a certain percentage of each secondary sale (peer-to-peer trade), which is sent back to the NFT’s originator.

Yes, the truth is that royalties from the creator are optional, but still almost impossible to avoid in the NFT area. That can be a good thing or a bad thing, depending on who you ask, since decentralized payments are facilitated by centralized funds.

Take OpenSea: If an artist’s NFT sells on the secondary market on OpenSea, the platform itself receives the royalty via the transaction. It is only after the royalty has been received that OpenSea, in this situation as an intermediary, sends the royalty payment to the artist.

But events like OpenSea are not the end-all-be-all. The advent of services like Manifold may change that. With manifold’s Royalty Registry, it is now possible to add creator royalties to smart contracts that initially did not support them. This will effectively make it easier for marketplaces to use appropriate on-chain royalty configurations instead of the aforementioned centralized model.

This is precisely why a debate surrounding the necessity of royalties to creators – and the viability of continuing to be facilitated by middlemen – has bubbled up recently, effectively dividing the community once again over the usefulness of NFTs.

What is the problem with royalties to creators?

Until recently, royalties for creators have been taken for granted within the NFT space. Similar to the concept of, say, tipping a waiter after a meal, royalties for creators exist as a socially accepted process — but one where creators can receive residuals from collectors every time their art is resold.

This is a fantastic system for creators, but not necessarily for collectors.

While it has become common to pay both a platform fee and creator fee when collecting an NFT, some collectors would rather not shell out an extra five percent on top of their already substantial transactions. Creator royalties mean that individual who has created a work of art is rewarded in cooperation with collectors, but – since some NFT price tags reach well over 1 million dollars – we are talking more than 50,000 dollars in fees paid by the collector alone.

But why wouldn’t we want to pay creators for their work, especially if it means others profit again and again? Take XCOPY, for example. The artist, who originally sold pieces for a few hundred dollars each, now has a series of works worth millions. Still, before he saw seven figures from his primary sale, collectors who traded his pieces peer-to-peer helped his catalog achieve value. Royalties he received through these secondary sales likely helped sustain his career as he continued to create new art.

But again, while royalties for creators are the norm, they are only enforced through user agreements created by NFT marketplaces. Although some smart contracts are coded to allow easy integration of royalties for creators, it is up to these marketplaces to honor these royalty agreements.

Because of this, and the differing opinions throughout the NFT ecosystem, royalties for creators have fallen out of favor with a portion of the NFT community. While we cannot draw a direct line back in time to where this conversation around creator royalties began, some recent announcements by NFT platforms and marketplaces have undoubtedly fanned the flames of this burgeoning dispute.

They in return create royalties

The vast majority of NFT enthusiasts are in favor of royalties. Many even have taken to social media to defend this facet of the NFT ecosystem. But while artists and collectors are undoubtedly at the forefront of this debate, platforms such as sudoswap and NFT marketplace X2Y2 have emerged as the most prominent opponents of royalties.

Recently, sudoswap announced the public release of its new marketplace protocol — one that doesn’t come without the support of royalties. How is this possible, when so many other marketplaces have implemented royalties as standard?

Well, sudoswap is an automated market maker (AMM) that works like a token Exchange and liquidity service. It allows users to sell their NFTs without having to first find a buyer. On sudoswap, users can exchange an NFT directly for ETH without having to accept a bid or wait for someone to buy the NFT. And because the platform is exclusively for peer-to-peer trading, NFT creators have no say in how their collections are represented or their tokens’ transactions.

Nevertheless, even though sudoAMM is not good for creators, it is still popular among collectors as the fees are significantly lower than other platforms. Since most popular NFT marketplaces charge a platform fee of around 2 – 2.5 percent, with an additional 5+ set by the creators, sudo has cut its trading fees down to 0.5 percent.

While platforms like sudoswap waive royalties to creators, others allow aggregators to decide whether or not to send kickbacks to artists. This is the philosophy of X2Y2, which recently announced for which buyers on the platform will be authorized select the amount of royalties, if any, they wish to contribute to artists and projects.

Why the royal creation debate is important

Beyond the platform-specific examples of opposition from royal creators, a rift is forming in the NFT space. And, much like the debate over whether art needs utility, it may simply come down to a question of morality and the underlying functionality of NFTs.

Simply put, NFTs do not come with built-in royalty parts. This is something that must either be offered or respected by NFT marketplaces. While most platforms offer creators the ability to set royalties, it is not required. And regardless of whether a royalty percentage is set at a smart contract level or not, marketplaces have it possibility (not a claim) to honor and implement royalties.

While many have weighed in on the topic, Beeple may have distilled the argument perfectly down to a humanistic proposition: The royal debate hinges on collective morality. And the morality of the room remained unchallenged as creator royalties became the norm throughout the NFT market. If sudoswap and X2Y2 have shown us anything, it’s that the NFT space needs discussion about how these norms are set, and whether or not they need to be respected.

As Dom Hofmann, co-founder of Vine and innovative NFT projects like Loot and Blitmap put it in a tweet, the discussion around creator royalties is “a boring mechanical debate and an interesting cultural debate”. This appears to be true, as it is undoubtedly possible to enforce a mandatory creator fee, but it calls into question the centrality of such action in a space that thrives on the idea of ​​decentralization.

If collectors don’t want to pay royalties to artists, should they have more choice in the matter? Can the NFT space really benefit from services that give traders a choice? Or are the artists and those who shape the content to have the last word? The jury is still out.