The royalties are dead, long live the royalties!

The idea of NFT royalties isn’t exactly new, but recently there have been more and more discussions around the topic. The arguments often get heated and boil down to whether or not users should be allowed to avoid paying them.

Despite a common misunderstanding, it’s not practical to enforce royalties completely on-chain. They are instead coded in the marketplace contracts. As a result, it’s up to each specific marketplace to honour royalties set by creators or not.

For a long time, all marketplaces did exactly that and distributed a portion of shares back to artists. However, in the summer of 2022, alternative marketplaces that circumvented royalties, namely, Sudoswap, emerged.

X2Y2, a big marketplace on Ethereum, moved to optional royalties at the end of August and Yawww was launched on Solana to offer an OTC experience with variable royalties.

In some cases, these zero-royalty marketplaces experienced huge increases in their volumes, taking market share from giants like OpenSea and Magic Eden. The trend was additionally exaggerated by the bear market with NFT volumes drying up. This resulted in a lot of controversy, especially as some “traditional” marketplaces went on the offensive

Magic Eden co-launched MetaShield, a tool that allowed collection owners to identify NFTs sold on marketplaces with no royalties and take appropriate action. This could include altering the NFT metadata, putting a specific flag on it or changing the image (e.g., blurring them).

MetaShield was the first major attempt to enforce royalties, but it’s not the only one, so let’s quickly go over a few other options:

• Restricting sales on non-whitelisted marketplaces. Making sure NFT can be interacted with only through approved platforms can help prevent royalties evasion. It can also result in power concentrated in the hands of select few marketplaces and comes with technical difficulties.

• Banning those who use zero-royalties markets from Discords, airdrops, IRL events etc. Potentially a better solution compared to any on-chain options but runs into a similar set of problems MetaShield does.

• Developing new NFT standards that enforce royalties at the contract level. Ultimately, this would require paying them on every transfer. While this could make evading royalties impossible, it would also force people to pay every time they transfer their NFT to their other wallet or gift it to a friend.

• Implementing conditional ownership. In this strategy, the ownership of a certain piece can always be revoked by the admin (i.e., collection creator) if the rules are broken (e.g., it is listed on the zero-royalties marketplace). Presents a danger of centralisation and goes against the ethos of “true digital ownership”.

Right now, there is no good solution to royalties, as all of the existing ones make tradeoffs in user experience, decentralisation and/or immutability. One thing left is to continue relying on existing social contracts. But why exactly are NFT royalties there in the first place, and is the future for NFTs actually royalty-free?

Since the inception of the NFT technology, royalties were one of the biggest features and unique selling points. They allowed creators to benefit from their work in perpetuity without practically any middlemen. The logic is that if the value of art is eternal, the same should be true for the artist’s ability to benefit from it.

Additionally, royalties provide a reasonably stable source of revenue for teams that are building something more complex than “just art” (e.g., gaming). The free mint model also doesn’t work in a zero-fee environment.

There is no denying that NFT royalties are great. But what are the arguments against them? The biggest one is that many NFTs are actually just fungible tokens with pictures and should be treated as such. While technically true, it fails to account for the true art, all the other various usecases for NFTs and support the real creators can receive thanks to royalties.

Admittedly, royalties are not the only way to ensure creators can receive value from the future of their creations. One of the options that is often brought up is encouraging artists to collect their own work. This way, they can benefit from future price appreciation while staying aligned with holders.

Fundamentally, it’s up to the industry to develop common practices around NFT royalties. At least until a better solution is found, the “social contract” in which everyone agrees to pay their fair share is the best form of enforcement the space has got.

Web2 has gone through similar periods of turbulence multiple times. Music and video distributors had to evolve and adapt to new models to stop piracy and zero-royalties services. Now, people can watch new TV series or listen to their favourite song at one press of a button, completely officially and with creators getting their share of the revenue.

Platforms like Spotify and Netflix won by embracing the idea of streaming subscriptions, compared to pay-per-view and older models. NFT creators deserve to be paid for their creations the same way musicians, artists and writers of the past did. But it might be time to move to a model different from taking royalties on each sale.

In retrospect, it is surprising that the royalties model held up for so long. NFTs have been around for at least four years, but zero-royalty markets saw increase in popularity only recently. However, Pandora’s box is now open - and in the short term, we will see more and more marketplaces implement variable royalties. This trend will continue until the community of artists, collectors, and developers comes up with a new business model.

There is already a lot of research happening looking into either making royalties enforceable or developing new ways to monetise NFTs. Until these models are developed, it’s on us (i.e., NFT buyers, sellers and enjoyers) to do the right thing and continue supporting artists, teams and ecosystems we believe in. And that is the stance Joepegs will take, protecting and preserving the right for creators to receive royalties on their artwork.