NFT Marketplaces refuse to pay artist royalties

One of the most potentially powerful tools for attracting artists, musicians and other creators to embrace blockchain-based NFTs as a way to distribute their work is at risk.

Royalties are a big draw for artists, who value the ability of most non-fungible tokens to allow the creator to add a royalty collection feature to each resale at the time it is minted. So every time an NFT is sold, a percentage of the price – usually 5% to 10% – is sent to the person who created it.

On October 27, LooksRare, the second largest NFT marketplace on the Ethereum blockchain according to DappRadar, announced that it would no longer collect and distribute artist royalties. Instead, it flips a quarter of the 2% protocol fee on transactions, so creators will get a 0.5% cut of sales. Which is better than nothing but a small fraction of the royalty fee that artists generally choose to charge.

LooksRare is the latest in a growing line of NFT marketplaces to wipe out a tool that has been hailed as a way to attract artists to the NFT marketplace in the first place and help them — especially the smaller and mid-sized artists struggling to make a living.

Until recently, this had mainly been a problem for NFTs built on the Solana blockchain rather than Ethereum, where the vast majority of non-fungible tokens are minted and sold. But like the smaller blockchain marketplaces, the growing draw of royalty-free NFT trading platforms is forcing the bigger players’ hands.

“The growth of zero-royalty marketplaces has eroded the overall willingness to pay royalties across the NFT space,” LooksRare said in a blog post announcing the change. “Good news for merchants, but with a big downside: the move away from royalties has removed an important source of passive income for most creators.”

In response, the post said, “we choose to lead the charge in this new landscape, by creating a competitive solution that continues to benefit creators: redirecting protocol fees directly to creators.”

Royally omitted

An increasing number of artists who distribute their work via this type of cryptocurrency, where no two tokens are alike, use this feature to provide a continuous stream of income. It’s a particularly good feature for small to mid-level artists trying to make a living from their work.

The problem is that this only works if the marketplace where the work is sold respects it and deducts and transfers the fee at the time of payment. There is no real way to build it into the blockchain as all someone needs to do is make a private payment from one wallet to another and then transfer the NFT separately.

Among those who have looked in is Mike Winkelmann, better known as Beep. His sale of a single work that was a collage of 5,000 other works of art for more than $69 million at Christie’s on March 11, 2021, made international news and brought NFTs to public attention.

Winkelmann, who said he has used royalties on all of his digital NFT artwork, said there is “ZERO way to technologically force royalties, so creators have to build a collector base that WILL honor those royalties…”. we cannot “smart contract” ourselves around this. If I have an NFT and I decide to “gift” it to someone, and then “gift” me 10ETH afterward, we’ve gotten around the royalties. If someone can explain to me how a smart contract will EVER stop, I’m all ears.”

I think the creator royal argument is actually a lot simpler than people make it out to be.

There is ZERO way to FORCE royalties technologically, so creators have to build a collector base that WILL honor those royalties… It’s that simple really. 🤷

— beeple (@beeple) 13 August 2022

Dominoes fall

Still, LookRare isn’t the first major NFT marketplace to crumble.

On August 26, the No. 3 NFT marketplace X2Y2 announced that it would not honor the royalty payments, instead making them optional. It also blamed other websites for the decision.

“Dominant aggregators intend to offer similar functionality in the near future,” it said in a tweet. “As such, X2Y2 would like to ensure that we are ready and stay on top of market movements.”

Buyers of X2Y2 can now choose how much royalty they want to contribute to projects.

Dominant aggregators intend to offer similar functionality in the near future. As such, X2Y2 wants to make sure we are ready and stay on top of market movements.

— X2Y2 (@the_x2y2) 26 August 2022

Instead, it said, buyers would be able to “choose the amount of royalties they wish to contribute to projects.”

Basically make them a NFT tip jar.

To people commenting on the thread that the move was horrible, X2Y2 said, “100% agree with you, should certainly not be the norm. That being said… unfortunately we have to stay in the room if we want to change things for the better in the long run. This move is NOT our preference!”

An alternative solution

Another solution, by a passing digital artist @Kaganiis an NFT token that allows creators to greenlight marketplaces where the token can be sold, so it cannot be transferred from one wallet to another without going through an approved marketplace that collects royalties.

Bidding on my proof-of-concept artwork, demonstrating marketplace listings determined by the artist – is open for 2 more days:

— 𝚁𝚊𝚗𝚎 🎨+🔗 kai.pcc.eth 🤗 (@kaigani) 24 August 2022

Details are unclear, but @Kagani has listed a “proof-of-concept” NFT work on the largest NFT marketplace, OpenSea, to show the idea.

A Solana-based marketplace, Exchange Art, announced a similar plan that it hopes will revive royalties.

Saying that a “social contract was broken and it’s time to take action,” the platform announced on Twitter on October 15, it is launching an opt-in Exchange Guaranteed tool that it says will allow creators to create tokens that can only be resold on the platform.

“At an alarming rate, platforms have decided to treat artists as a SKU instead of people,” a Twitter thread said. “Royalties exist for a reason, and creators shouldn’t worry about being listed on sites that reject their rights.”

Both plans raise an important question: What happens to the work if the marketplaces where it can be sold go out of business?

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