NFT Marketplaces Drop Standard Royalty Fees Labeled ‘Shortsighted’

Sales of non-fungible tokens (NFTs) fell to US$700 million in August from US$4.7 billion in January as buyers pulled out amid the wholesale decline in cryptocurrency prices. One method of trying to get them back is to make payment of royalties to NFT creators optional. Welcome to the backlash.

Royalty fees give the NFT creator a percentage of the price every time the NFT is sold, but the largest Solana-based NFT marketplace Magic Eden made it optional last week, a move called “short-sighted” by Sean Ryan, CEO of player-focused NFT marketplace AQUA.

The trend will hurt creators and the industry in the long run, he said in emailed comments Discard.

“In the pursuit of trading volumes, these platforms have lost sight of the critical importance of creators and the very value they bring to marketplaces,” said Ryan. “Without these artists—and compensating them fairly for their work—there would be nothing to exchange in the first place.”

NFTs are seen as central to the development of Web3, or the development of a decentralized internet built around blockchain technology and a place where individuals own the rights to their data and their work. Nixing royalties puts that vision at risk, said Salah Zalatimo, CEO of Voice, a digital art marketplace.

“It undermines one of the biggest promises and exciting developments in the creative Web3 space — which was to more fairly compensate artists by providing lifetime royalties,” he said by email, but added that markets are nimble and will adapt changed circumstances.

“This will create a clearer distinction between the platforms built for traders and the platforms built for artists. An artist will be able to choose which platforms their NFTs will trade on, he said.

Boring

There have been attempts in the past to introduce ongoing royalties for artists, such as in the EU, but in an industry where not all transactions are recorded on the blockchain forever, this rule can be difficult to enforce.

Ryan said that if content creators no longer receive royalties, they will seek other opportunities that compensate them more fairly, to the detriment of the NFT industry.

“I can’t think of a more boring ecosystem than one without great content,” he said. “Committing to paying royalties to creators is an investment in the people who keep our industry alive. Great things come when we build together.”

Magic Eden typically controls around 90% of NFT trading volume on Solana, but had started to lose market share to smaller competitors in recent months, such as Hadeswap and Solanart, both of which offered optional royalty payments.

With Magic Eden now doing the same, the overwhelming majority of NFT trades on the Solana blockchain do not automatically pay royalties to creators. Some users vented their frustration with the move on Twitter.

“This is by far the worst decision you could have made,” he tweeted one user, Code Monkeywhose profile is listed as founder of the Solana platform, NodeMonkeyNFT.

“Creators/founders stick by you through thick and thin. This will send projects to zero and prevent new project growth. Consider building a method to enforce royalties instead of giving in, the tweet said.

Open sea

However, it is a slightly different story on Ethereum – by far the largest blockchain for trading NFTs – which is again dominated by the world’s largest NFT marketplace, OpenSea. The site still offers royalty payments as standard, not optional.

OpenSea reported sales in the last 30 days of more than $320 million, which is almost 4.5 times that of its closest rival on Ethereum, X2Y2. However, similar to Solana, smaller marketplaces are nipping at their heels by offering different pricing structures.

X2Y2 said in late August that it was introducing a feature where buyers could set their own royalty fees, acknowledging the debate surrounding the issue, but also noted that a 0% fee that has become the norm is not the best for the industry.

“We will work with market participants from all sides to ensure that does not become the norm, as it is up to us, collectively as an industry, to set the right standards and pave the way for the future of the NFT space,” the marketplace said via Twitter i announces the move.

Similarly, decentralized exchange Sudoswap has exploded in popularity in recent months as it offers royalty-free trading, growing from under US$300,000 to over US$3.3 million in total value locked during August, according to DeFiLlama.

The Voice’s Zalatimo said it is difficult to predict what percentage of users will forego paying royalties to the creator on any platform, but he said the majority of merchants on major platforms are not on board to support the artists, and will choose to keep the royalty fee itself.

“It’s a clear signal from platforms that are built for trading, not collecting. They see speculators and assets as their target audience, rather than artists, he said.

As the NFT market looks set to record its sixth straight month of secondary sales declines, AQUA’s Ryan said this is a make-or-break time for many of the companies involved.

“Now is the time for NFT platforms to differentiate themselves from their competitors and bet on the community,” he said. “This goal can only be achieved by meeting the demands of users while ensuring that the needs of creators are met, which can be a difficult balance to strike. I expect many of the companies that make it through this bear market will become the household names of tomorrow .”