As a writer, I’m a words guy, so let me start by clearing one thing up. What we call “royalties” in the NFT world is actually a commission. Royalties would mean the artist gets paid when an NFT is used for something (for example, when it appears in an ad or is printed on a t-shirt). A commission is paid on a sale-by-sale basis, which is exactly how the “royalties” model works in NFTs. So you’ll see me use the words royalty and commission fairly interchangeably throughout the article, but just know that there is a difference.
Now that I’ve finally gotten that off my chest, let me take a moment to explain why I’m dedicating this week’s NFT update to sharing my opinion on NFT royalties.
Why NFT Royalties Are a Hot Topic
Magic Eden (a marketplace for NFTs on the Solana chain) is the latest NFT marketplace to make royalties optional. Another major NFT marketplace (X2Y2) switched to this same model back in August. Some argue that royalties were great for introducing artists to the NFT ecosystem, but now we’ve matured past the need for them. Others view the bypassing of royalties as theft.
But NFTs are not the only artistic industry where royalties or commissions are paid out. Consider just a few examples.
Lessons from the Music and Photography Industries
If you think you’re not paying royalties to music artists and songwriters just because you stream all of your music rather than buying and downloading files, guess again. Music artists often receive 20% royalties on streams. So whether you have a monthly subscription to something like Spotify or Apple Music or you are listening to paid advertising in the free version of a streaming service, you’re the one paying those royalties. (And P.S., these are actual royalties because the artist/songwriter/etc. is being paid per stream and not just when a sale is made.)
The stock photography market uses a similar model, although they rightfully refer to the money paid to photographers as commissions. That’s why you see all of these “royalty-free” marketplaces like Adobe Stock, Getty Images, Shutterstock, and Pond5. When you buy an image from these sites, you don’t have to pay “royalties” to the artist every time someone views your website or the post you used the artwork to make. However, the photographer receives a commission when you download the image or video (usually somewhere between 15 and 50%).
Without royalties, we wouldn’t have the music and photos we see today all over the internet and social media. So if we’re already paying royalties (commissions) to other artists, why is it suddenly a big deal in the NFT world? Let’s consider the impact of the elimination of royalties on the NFT marketplace.
Unwanted Side Effects from 0% Royalties
There are plenty of people touting the benefits of 0% royalties, so I’m going to take the opposite position and explain some of the “worst-case scenarios” that could develop due to a 0% royalty model.
· Fewer airdrops – Think of some of the most popular collections on the IC. Collections from Motoko NFTs to OG Medals to PODs to ETH Flowers to FACELESS to DfinityGangs were all airdrops. The artists can do this because they receive a commission on secondary sales. I’m not saying all airdrops would go away if artists couldn’t rely on commission from secondary sales, but there would certainly be way less. I can also envision a scenario where airdrops are withheld from collectors who bypassed royalties.
· More rug pulls – If NFT collections only make money on the initial sale, what is the incentive to keep adding value? It’s true that for an artist, the incentive is in sharing our art, connecting with collectors, and launching future collections. But for many “projects,” the incentive is to create a passive income. Without royalties, you can expect to see a lot more of this.
· Real artists may take their art where it is appreciated – One of the big complaints I hear from people is that the art in NFT collections is often subpar. If you want that to change, taking away the incentive for quality artists to join the NFT marketplace is not the way to do it. If an artist is only being paid for initial sales and there is no ongoing royalty, they may as well sell physical paintings in a local park. At least they’ll get some fresh air while hardly making any money.
· Increased mint prices – To counteract the lack of commission on secondary sales, artists will likely increase initial mint prices. I personally factored in the state of the current market when setting the mint and royalty prices for Colorful Abstracts. I charged a fraction of what I normally would for my art, assuming that I would make something on secondary sales long term. Without the secondary market royalties, I would have had to charge at least ten times in the initial mint to make the sale worth the six months I put into creating the art and marketing the project.
"If you would like to collect an artwork on the secondary market, listings will take place on the Entrepot marketplace. I will be setting a royalty fee of 9% since the collection is so small, the artworks are all 1/1, and I’m keeping the initial costs low on the launchpad. This will also help me to fund further collections. Please, keep this in mind when trading." Me - From my Nuance blog introducing the Coloful Abstracts collection
· Lots of unsold collections – That brings us to my next point. I’m also well aware that at ten times the price, my collection may not have sold out. In fact, I might not have sold anything in the current market. I’m sure other artists would experience the same thing, and the marketplace would be full of unsold collections. Then, the temptation would be for artists to take the unsold artworks to the secondary marketplace to sell them for less. This would immediately devalue the art for those who decided to collect during the initial mint.
· Poor alternatives – The worst thing that could happen is if marketplaces decide to change to other models that create a far worse scenario. For example, some have suggested a possible Harberger Tax, in which some ICP is automatically subtracted from a collector’s wallet annually in order to compensate the artist. In my opinion, this could create a “race to the bottom” where collectors try to dump NFTs they don’t want to pay an annual tax for before the payout date arrives. It also raises the question of what would happen to NFTs if a wallet didn’t have the funds available to pay the tax.
If It’s Not Broken…
In the end, I don’t have an alternative solution to the royalty model for NFTs because I don’t think there’s anything wrong with it. I think flippers are ultimately the only ones who gain from not paying a commission to the artist. I think artists and genuine collectors (and even marketplaces) will eventually lose if the royalty goes away.
In the meantime, I’m open to hearing from the community about alternatives. I just haven’t heard a viable alternative yet that solves the issues I present above. Feel free to comment below and let me know your thoughts and if you have a better solution.
Thanks for reading! I’ll see you next week.
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