for quite some time now, the topic of royalties (aka artist royalties or creator royalties) has been dominating the NFT space. Mostly, it’s been general arguing and bickering on Twitter and elsewhere, but yesterday OpenSea made a move that’s going to really push this into the next level. Whether it turns out to be a good or bad move is up for debate. Here are the basics on this whole issue, at least from my own perspective.

Background on NFT Royalties

My very first article on NFTs came out on April 2, 2021, just a few weeks after the famous $69 million Beeple NFT sale (the mind-boggling event that launched my own obsession with NFTs). In that article, I noted that NFTs “were conceptualized way back in 2014 by a tech guy and an artist — Anil Dash and Kevin McCoy (story here in The Atlantic) — specifically as a way to help artists.”

Helping artists has always been at the core of NFTs. And, at the time of their invention, the initial push of that whole thing was the novel creation of a unique digital asset — something that was not fungible (by virtue of it being singularly tokenized on the blockchain). Dash and McCoy apparently initially thought of NFTs as “monetized graphics,” according to that Atlantic piece.

And years went by with little fanfare aside from various at-the-time minor NFT projects like the crypto punks (which anyone back then could have grabbed for free). And then in 2021 the whole thing blew up Big-Bang-style, first with that Beeple sale, and soon after with generative sets like the Bored Apes.

Once 2021’s market took off, most of the action transpired on OpenSea, still the largest marketplace for NFTs. And thankfully, OpenSea implemented a royalty system. When you had a collection, you would specify a royalty that you wanted (up to 10%) and anytime an NFT sale happened from that collection, a wallet address specified by the collection owner would receive the specified royalty. (Well, it didn’t happen in real-time like that, but that was the basic concept.)

Now, it might be a fair question to ask: “Why was it ever up to the marketplace to setup this royalty system instead of just having that whole thing be dictated by on-chain code, as part of NFTs themselves?” In fact, I think this is a great question.

The answer is that it kind-of can’t be part of the system (speaking for Ethereum, anyway). That’s because, as the owner of an NFT, you’re free to do what you like with it, including transferring it to others (or to other wallets of your own) for free if you like. (A good article about this is “Why NFT royalties are almost impossible to enforce on-chain” by MK Manoylov, in which a dev named Nicholas notes that “… as long as you allow the holder of the NFT to send the NFT to another address, it’s impossible to stop a marketplace from using that function to do the transaction.”)

So it’s super-cool that OpenSea built royalties into their initial functionality, as they didn’t have to do it. But I think at the time of OpenSea’s initial rise into the stratosphere, the space was different. It was young and idealistic, and the emergence of a dominance by investors and flippers hadn’t yet taken hold. What had begun as a concept years before (with experimental sets like the punks) had transitioned into a focus on projects with exceptional art (like the Bored Apes).

But royalties became big business. The most relevant article on this currently would be one that came out a few weeks back from Galaxy Digital entitled “NFT Royalties: The $1.8bn Question.” In it, they highlight figures from the top 10 earners:

So yeah, that’s a whole lotta cash ($1.8 billion in all so far) paid out by a system that was/is, technically speaking, completely voluntary. Considering this, the NFT space was for a surprisingly long time a huge free market in which mega-player OpenSea had little significant competition. Couple that with (1) there clearly being room to form additional profitable marketplaces with lower fees than OpenSea, and (2) whatever you want to call the notion of increasing profitability for sellers (and maybe also lowering prices for buyers) all at the expense of denying creators / artists a (voluntarily paid) requested share.

Regarding item (2) above, is “greed” the word there (speaking of the motive of so many users to not pay creator royalties)? Sounds greedy to me, as I’m all for rewarding creators and artists. But indeed, these other marketplaces popped up and started taking market share away from OpenSea.

It should also be noted, of course, that we’re also in the midst of a particularly bizarre time, which has played into this in complicated ways. We’re still in a difficult / extended bear market at the moment, crypto is all over the place and moving wildly in unexpected ways, the industry had a big crash today with the FTX exchange, oh and to top things off, it’s a major U.S. election day as well, which could send all markets (stock, crypto, etc.) in any direction depending on the outcome.

11/6/22: OpenSea Reacts

A few days ago, OpenSea reacted to the royalty issue with a blog post called On Creator Fees. I’d encourage all interested to read that post, but the big takeaways, action-wise, are:

UPDATE: On 11–9–22, OpenSea issued an updated policy stating that they will indeed enforce royalties on existing sets. Thrie thread on this is here.

It’s been a controversial move, as some likely see it as going against the anything goes ethos of decentralization. And others may have novel approaches of their own that don’t require changes to smart contracts. But, OpenSea is the biggest player and they’ve got a lot of power. So, if you want royalties from them, then you have to implement their Operator Filter Registry. Otherwise, the only royalties you’ll get would be from whatever other marketplaces offer them — and those are currently minor outliers.

One thing I can definitely note, having been on 20+ ETH generative NFT drops to date, is that royalties represent a significant line item in most team’s budgeting (sometimes the only source of revenue, for example with free-mint projects). Yes, there are other monetization possibilities aside from royalties, but basically post-sellout, the most significant source of operating income depended on by teams is royalties.

So, at this point, it seems like adopting this new on-chain tool is what most generative NFT sets will wind up doing. That’s a bit of a tough thing for sets getting ready to launch at this very moment, as we don’t really know exactly what’ll happen in the coming months, and it might be beneficial to wait a little bit and see how this issue evolves in the near-term. (Indeed, I have a few projects who are opting to postpone mainnet deploys for a bit.) Time will tell!