Why NFT creators are up in arms about royalties – and rightly so

For weeks, leading NFT marketplace OpenSea has been dealing with backlash from creators after it made significant changes to its resale royalty policy that rocked the creative community and left many within it feeling betrayed.

The reaction followed OpenSeas February 17 announcement that it was making resale tax enforcement optional on a number of NFT collections – more like a tip if buyers felt like paying for it. Essentially, imagine being promised, and counting on, an ongoing 10% royalty on every resale of your creative work, but then having it deducted. Many creators felt that OpenSea had failed a fundamental tenet of their agreement, and the backlash was swift. After all, blockchain’s promise of continued royalties represents the most critical benefit of NFTs for creators.

In a recent conversation, OpenSea’s chief business officer Shiva Rajaraman told me he regretted this reality, but found most of the hate directed at it to be confusion. Affected NFT collections were those without OpenSea’s “operator filter” – “a couple of lines of code” that enable on-chain enforcement and are apparently easy to add. But those creators who launched their collections at a time when they had no reason to believe that on-chain enforcement was necessary—and when no operator filter code was even available to them—are now, for the most part, simply out of luck .

Rajaraman assured me that OpenSea remains absolutely committed to preserving royalties on any new collections coded with the operator filter, or alternative enforcement tools from companies like Manifold – code that basically designates which other marketplaces can sell collections created on OpenSea. But when I later asked the company if the latest insurance to the creators was now ironclad, it seemed to hedge its bets. Yes, a company spokesperson told me, as long as its commitment was coupled with a way to ensure that NFT collections could not be sold royalty-free on other marketplaces—an answer that seemed to take us right back to the kind of thinking that got the company in hot water with creative in the first place.

To its credit, the company openly acknowledged that it changed its resale royalty policy in direct response to competitive headwinds. Competing marketplace Blur, which uses 0% transaction fees like calling cards, is reported to have skipped the marketplace that OpenSea created. According to The Information, Blur now has roughly 80% of global NFT trading volume, using its race to the bottom strategy as its way to the top. In a tweet, OpenSea lamented the fact that “most volume … has moved to a zero-fee environment” and that this unfortunate new reality “required” a change to its own policies.

I asked OpenSea how many creators are affected by this change. The company responded that it does not share this data, and ultimately the exact numbers are less important than what OpenSea’s new policy represents. Creators who had invested their time and trust in OpenSea based on what they believed to be a guaranteed, gated stream of royalties for resale now suddenly found themselves at the mercy of retailers. And in an emerging Web3 world populated by significant numbers of profit-maximizing speculators, good graces can be hard to come by.

We’ve seen this movie before. When a company’s sales volume and market share plummet—as OpenSea apparently did here—unbridled investor pressure and priorities almost always win out. And here, the profit-maximizing priorities of OpenSea buyers and sellers trumped those of the creators who built that value and investors’ marketplace in the first place.

Of course, it’s easy to Monday-morning quarterback OpenSea’s decision to change the rules of the game while the players are still on the field. The company faced massive pressure and significant lost sales volume as a “white knight” among competing “take no prisoners” players in this great NFT land grab. There were undoubtedly no easy (or even not so easy) solutions.

Nevertheless, from the perspective of the creative community, it was incumbent upon OpenSea to do something that put the interests of the creator first. And I’m not sure that suddenly announcing a significant policy change on Twitter was the way to go. Real outreach to and proactive engagement in the creative community was what was needed. After all, if creators aren’t motivated to play in this new Web3 sandbox, fewer sandcastles will be built. This is typical short-term thinking. Zero percent fees may taste good now to buyers and sellers. But creators need, and deserve, to be fed too.

Regardless, OpenSea’s rough waters serve as a warning. Web3 and NFT continue to confuse and confound most of the world. After all, we are at the beginning of the commercial blockchain. And such confusion often leads to skepticism—skepticism that breeds a tendency to write off the general Web3 opportunity rather than learn and embrace it. That’s why NFT’s headline promise to creators – ongoing baked-in royalties – is so critical. Royalties give creators something new and transformative. And here’s the thing: Blockchain’s unique power to deliver the goods is real.

NFTs were never meant to be pump-and-dump, get-rich-quick schemes. Their true power and promise rests in delivering real value, connectivity and community – and, most importantly, a revolutionary new way for artists and creators to recapture so much value lost to Web2 intermediaries like Facebook, YouTube and the app stores. NFTs offer a bold new way for creators to connect directly with their audience to enable a mutual exchange of value, as I wrote in TheWrap last fall.

OpenSea, a long-time respected innovator in the Web3 world, had the power to lead here, take a stand for creators and move NFTs closer to their ultimate promise. Instead, faced with rough seas, the captains abandoned ship.

For those of you interested in learning more, visit Peter’s company Creative Media at creativemedia.biz and follow him on Twitter @pcsathy.