0% Royalties — The End Of NFTs?
0% royalties are heavily debated. Some say it is the best thing that can happen to the NFT space, some say it’s going to kill it. As always with such discussions, a story has two sides and with this article we try to work out the pros and cons of 0% royalties and look for alternatives of this new narrative.
Royalties — What Is It?
The graphic above shows what royalties are and how they work. Basically royalties are a small tip, that you leave for the NFT creator. They are automatic payouts to the creator from resales. The royalties of each NFT are coded into the NFT’s smart contract. Every time a secondary sale happens, the smart contract provides the marketplace with the percentage of the royalty, that the creator desires. The marketplace, that handled the sale, then enforces royalties paid to the creator.
The resale of Beeple’s NFT „Crossroads“ shows how powerful royalties can be. The artwork was resold for $6.6 million in February 2021 and Beeple received 10% royalty of this transaction.
How much a creator receives differs from marketplace to marketplace. However, 5–10% is considered the standard for royalty percentage. If you want to check the royalties for a NFT you can go to NSWAP.com and click the info section, where the royalty percentage of every NFT is displayed.
When royalties were introduced, they were something like the holy grail for artists and creators and a never seen before opportunity. Artists are receiving increasing returns from their work, especially as their popularity grows. A big problem for many artists has always been, that they sold their art cheaply at the beginning of their career, and as they became more and more famous over time, could only watch as early buyers resold their art for large sums without participating in these profits. With the introduction of royalties, this problem was solved.
Another feature is, that the NFT can be sold, but the copyrights remain with the original creator. If they want to, the creators can also sell their copyright to others and the new owners can then earn royalties due to their rights. The best known example is Yuga Labs with its BAYC. The owners of the NFTs own also the IP and are entitled to create anything they want with it. Additionally they can keep the revenue, if they generate some, and don’t have to pay royalties to Yuga Labs.
And not only artists can profit from the royalty system. Also singers, songwriters, authors or any other person which brings their personal work to the market and sells it with the help of blockchain technology.
But something changed over the last couple of months. A new narrative, called “0% royalties” appeared and is dividing the market. Let’s take a deeper look and see why this topic is so controversial.
0% Royalties
0% royalties basically means, that the creators of a NFT will be cut out of the profits a seller makes, when reselling it on exchanges.
Certain exchanges do not pay any royalty to creators. By cutting out the creator and discounting the token to attract a larger volume of sales, these marketplaces can offer NFT collectors the cheapest possible prices. SudoAMM based on SudoSwap is one example, that has taken off recently. A number of other exchanges have followed the Ethereum NFT marketplace in offering 0% royalty fee transaction models. Solanart, a Solana based NFT marketplace, even allows buyers to pay creators 0% as well as any fee they wish. In spite of the fact that most major marketplaces require creators to pay royalties, it isn’t an unavoidable requirement. Rather than being a logical construct, it is a social construct, and it is closely tied to the web3 philosophy of fairly compensating creators, which is the main reason why it’s so heavily discussed.
In the eyes of many people from the web3 community, these marketplaces are acting very much like the web2 platforms that blockchain seeks to dethrone by avoiding royalty payments to creators.
Disadvantage Of 0% Royalties
The most obvious disadvantages is the elimination of security, stability and longevity. An agreement with a royalty clause shows that a creator is committed to ensuring a project will succeed and continue to provide value long after the release date. Royalty fees prevent creators from making a huge profit on the initial sale and abandoning their projects, causing the value to plummet.
On the other side are the marketplaces that want to attract more users. Buyers who want to make the maximum profit with NFTs are very likely to choose the cheaper marketplace. So, in order for platforms not to lose users, they have to catch up to keep up with the competition. That’s basic free market economics.
Alternatives To 0% Royalties
As a VC, we understand both sides and cannot take a position. What we can do, however, is look for alternatives that can benefit both the artists and the marketplaces.
Decrease Royalties
In today’s market, projects and marketplaces can implement an easy solution by simply reducing their royalty cut. As written before, it is common for royalties to range from 5–10% in many collections. Some may even reach 15%. One option could be a 1% marketplace fee and creator royalties from 2.5–5%, which isn’t that low and could holders prevent from trading on 0% royalty platforms.
Report NFTs Listed On Peer To Peer Or 0% Royalty Marketplaces
Another approach, that we don’t recommend, but that’s discussed in the community is to penalize holders, that list NFTs on 0% royalty marketplaces. For example, holders which do so could be excluded from the NFT’s utility like staking, access to private Discord channels, e.g. Communities have always been crucial for NFT projects and if they would penalize their own community this could lead to very bad publicity for the projects, which should be avoided by all costs.
The Harberger Taxes
In a Harberger tax system, holders would set the “fair value” of their NFTs and pay a fraction of that periodically in perpetuity. That way, owners are incentivized to price their NFTs proportional to the value they are willing to pay to keep them. Which is similar to the Ethereum Name Service, where you have to renew your name address every year. The advantage with this system ist, that original creators can gain exposure to their works forever regardless of whether they are being traded or not.
Build A Loyal Community
It will ultimately be up to creators to accept, that if a technical solution isn’t found, they will be unable to stop people from bypassing the royalty scheme technologically.
This is easier said than done but in such market dynamics, loyalty holders are the best way for NFT collections to thrive. After all, many consumers purchase products from social enterprises because they want to support their causes. The same can happen with NFT projects as holders are usually incentivized to help their creators thrive, but it would take a loyal community to pull this off.
Conclusion
As it looks right now there are not many projects with 0% royalty, but some of them could make it without royalty. The big problem is that many big players have already introduced 0% royalty and it seems that this will become the standard. Even if the big marketplaces decide against this trend there is no technical way to avoid 0$ royalties at the moment.
From our point of view, NFT projects should therefore consider already at the beginning of the project how they can generate revenue without royalties and make this a fixed point in their business plan.
Who We Are
Moonrock Capital is a Blockchain Advisory and Investment Firm, incubating and accelerating early stage startups since 2019.
Website: https://www.moonrockcapital.io
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