Creator Royalties: Breakdown of the Debate

Creator Royalties: Breakdown of the Debate

Written by
Leonie Engel
Date published
October 26, 2022

1/ Lost track in the ongoing NFT royalty thunderstorm?

After the heated @Unchained_pod debate between @laurashin@ljin18@hosseeb, and @ZhuoxunYin, I tried my best to aggregate the key arguments and ideas flying around Twitter.

Let’s get started 👇🏼🧵


2/ Arguments referenced in this thread are mainly based on this episode of The Chopping Block - make sure to tune in if you're ready for a little crypto blockbuster 🔥

3/ Before we begin: what are royalties?

💵 Royalties are a fixed percentage of an NFT's price paid to the creator in case of a secondary sale. This makes it possible to perpetually reward a creator for her efforts, and let her benefit from a future increase in value.

4/ Royalties are solving a long-standing, huge problem:

Imagine you're a young artist and sell a painting to a collector for $1K.

Years later, as you've grown in popularity, the collector sells the painting for $1M.

Wouldn't it be cool to also let you see some of that money?

5/ Until recently, major marketplaces with the most popular one being @opensea enabled creators to set a royalty fee (usually between 5-15%) when minting their NFT.

After the primary sale, every time the token gets sold, the seller has to pay this predetermined royalty fee.

6/ However, against common misconceptions, these royalties are NOT hard-coded into smart contracts.

It's basically the marketplaces‘ decision whether they honor royalties or not.

In other words: in order for royalties to be paid, marketplaces have to WANT you to pay them.

7/ So, why did we ever decide to pay any royalties?

As @Zeneca_33 states, royalties have been one of the cornerstones with which the entire space has been built.

New monetization mechanisms were amongst the key innovations driving the creator economy.

8/ Yet, in the last few months, we've been seeing a steady digression from this social norm.While OTC trading has already been around for quite a while, new marketplaces, both on Solana and Ethereum, have made it even easier to trade NFTs without paying any royalty fees.

9/ @sudoswap, an AMM on Ethereum, launched in July this year.

Their 0%-royalty and 0.5% trading fee originally triggered the discussion about royalty fees.

@the_x2y2 followed shortly after by introducing optional royalties on their Ethereum-based marketplace.

10/ Facing severe competitive pressure, Solana's biggest NFT marketplace @MagicEden

(80% market share by trading volume) ultimately decided to follow the optional-royalty shift.

From now on, the BUYER of an NFT decides whether he wants to voluntarily pay any royalties or not.

11/ It's worth noting that honoring royalties is still the default for all listings/collections on ME, so the buyer has to actively opt out.

Still, after more than a week w/o royalties, most buyers' preference is pretty obvious 👇🏼

chart by @tomhschmidt


12/ What followed was a pretty heated debate on Twitter that mainly boiled down to 2 questions:

1) Why is it currently not possible to enforce royalties on a smart contract level?

2) Is it the right decision to make royalties optional across most marketplaces?

13/ Why is it currently not possible to enforce royalties on-chain?

As illustrated by @ape16z, enforcing royalties on-chain while being Turing-Complete currently demands at least some degree of censorship/surveillance.

This again contradicts crypto's permissionless philosophy.


14/ Developers are still working on on-chain royalty enforcement solutions:

- $SOL ecosystem: @metaplex has announced that they're coming up with a new token standard enforcing royalties

- $ETH ecosystem: 2 open EIPs (EIP-2891 & EIP-4910) aim to automate royalty processing

15/ I'm not going to dive deeper into each of these projects for now but highly encourage you to make yourself familiar with each of these proposals.

TL;DR: For now, we have to face a reality in which on-chain royalty enforcement does NOT exist.

16/ This takes us to the second question:

Given current circumstances, should marketplaces “enforce” creator royalties like @opensea is still doing? Let’s start with the pro side…

17/ PRO 1: 0% royalties are a short-sighted business decision.

Marketplaces should put creators' interests above purchasers' preferences. If creators leave a platform due to monetization struggles, purchasers will follow them.

"Don't bite the hand that feeds you." - @ljin18

18/ PRO 2: Royalties support the development of the ecosystem.

Most of us will agree that we're still at the very beginning of web3. Onboarding more creators by incentivizing them with new monetization mechanisms is crucial for the growth of the ecosystem.

19/ PRO 3: Royalties are a strategy to align incentives between creators and collectors.

If artists also monetarily benefit from an increase in value, they're even more incentivized to produce high-quality works and gain in reputation.

20/ PRO 4: Royalties prevent quality dilution.

If a creator can only make money from primary sales, she could simply aim to produce more work. With decreasing rarity, demand and quality might diminish over time.

This would also impact existing holders.

21/ I agree that most of these arguments are either rather moralistic or simply based on yet-to-be-proved assumptions. Let's take a look at the arguments against enforcing royalties on a marketplace level:

22/ CON 1: Code is law - we should follow its rules. Show me the incentive and I show you the outcome. According to @hosseeb, this is the iron law of crypto. So, unless there are mechanisms to enforce something, competitive dynamics will ultimately cause it to get forked out.

23/ CON 2: Enforcing royalties contradicts the promise of a permissionless infrastructure. One single & central party deciding whether royalty should be paid or not doesn't work in a fully decentralized network. We can't just pick the cherries.

24/ CON 4: In order to be valuable & sustainable, royalties need to be voluntary.

People will always find ways to bypass policies on marketplaces.

Thus, it's about motivating people to pay royalties without having to force them to do so.

25/ So, what do we make out of all this?

My key takeaways from the debate:

- We need to find ways to incentivize royalties instead of enforcing them

- Creators will need to find additional monetization strategies

- We shouldn't generalize NFT purchasers: traders ≠ patrons

26/ There are two options for creators to motivate traders to pay royalties - sticks & carrots:

🧹 sticks: "punish" collectors if they decide to avoid royalties, or make ownership conditional

🥕 carrots: reward collectors who pay royalties

27/ On the stick side, protocols like @cardinal_labs on Solana empower creators to control where and under which conditions their NFTs are traded. For example, a creator could decide that his NFTs can only trade through royalty-paying contracts.

28/ On the carrot side, @blur_io - an NFT marketplace for pro-traders - came up with a pretty compelling concept to encourage royalties:

While they don't force traders to pay royalty fees, those who do get rewarded with a $BLUR token airdrop.

29/ Sticks & carrots aside, coming up with creative ways to monetize artists' efforts beyond primary and secondary NFT sales might be the only way for creators to become independent from major marketplaces.

This could mean charging for additional services or limiting IP rights.

30/ For community and membership projects, subscription-based NFTs could be another option, i.e., you sell tokens that only include access or utility for only a limited amount of time. After the expiration date, members would have to renew their membership.

31/ The last alternative I think is worth mentioning are Harberger taxes.

Slightly similar to property taxes, HTs are regularly paid, predetermined fees you need to pay to keep your asset.

32/ Above all, the recent developments also gave proof of the fact that there's not just one type of NFT collector (while there’s also not one type of creator!).

We're facing an increasing divergence between patrons and traders - and should cater to their deviating motivations.

33/ 💵 Traders: buy with the intention to make profit--> higher price sensitivity due to primarily monetary incentives, lower WTP royalties

🎨 Patrons: buy with the intention to support a creator, no short-term motivation to sell --> lower price sensitivity, higher WTP royalties

34/ The emergence of marketplaces like @blur_io or @the_x2y2 already introduced dedicated low-fee solutions for traders.

I'm pretty sure that there will be equally verticalized marketplaces for patrons accepting or even seeking higher fees to support their favorite creators.

35/ Ultimately, I agree with Beeple and many others on the need to generally rethink what royalties mean to us, and how this should be reflected in who pays them:

A buyer aiming to access a new community is far more motivated to voluntarily pay additional fees than the seller.

36/ This topic for debate will be ongoing for a long time. As @avichal nicely framed it: We are with NFTs today where we were with ETH around 2016. We’ve just figured out the very basics. Many innovations are yet to come.

Sooo, let’s innovate!

37/ @MagicEden has announced a $1M Creator Monetization Hackathon to find solutions for royalty enforcement & new monetization models.

So, if you're working on something in this space, reach out to them (after dm'ing me, I'd love to chat! 😊)

38/ One thing we shouldn't forget:

There's no creator economy without creators.

Quoting @laurashin: Income is fungible, [...] art is unique. Now more than ever, creators need a seat at the table. I'm excited to see where this will take us!

39/ If you're interested in some artists' perspectives, make sure to listen to the recording of @arsnlart's Twitter space from today with @artnome@tylerxhobbs@dandelion_wist@PeterStella, and…

40/ Huge Thank You to @scrptdfntsy@MPtherealmvp@_nic_hamilton_@kiernangeo, and @yb_effect for sharing your thoughts, and providing feedback.