Why royalties are integral to keeping Web3 art alive

3d rendering NFT or non fungible token. Collection of crypto art packages hanging on the shelf.

A number of NFT marketplaces have recently made creator royalties optional in order to sell digital tokens at lower prices, directly interfering with one of the core revenue streams for Web3 creators. Without effective workarounds, brands could lose many of the key creative partners leading them into the space.

This is an uncomfortable shift seeing that royalties are largely the reason why Web3 is considered a creator-friendly alternative to Web2, where walled gardens maintain control over monetization, as well as the traditional art world. Smart contracts enable royalty fees to be programmed into NFT transactions, so that each time the token changes hands through a sale, the creator receives a small cut of the payment.

To grasp their legitimacy, it should be noted that Ethereum-based NFT creators alone have earned nearly $2 billion in royalties to date, according to research from crypto finance firm Galaxy Digital. And that’s not to count for other crypto currencies like Solana. While just 482 collections account for 80% of this revenue, smaller artists could still see 10 or so resales a year, said Coco, an artist for NFT collective Stardust Society. Multiply each of these sales by the 5% average royalty that OpenSea, the largest secondary marketplace, has historically paid, and income could quickly compound.

Brands including Gucci, Adidas and Time have leveraged royalties as a way to court creators through NFT collaborations. And the practice has become quite lucrative: As of August, Gucci had pulled in $1.5 million in royalties, Adidas nearly $4.7 million and Time just over $3 million, according to data on blockchain analytics platform Dune Analytics. The portion of these royalties that went specifically to creators is unclear.

This royalty-withholding wave began in August when Sudoswap, a decentralised NFT marketplace that does not honour royalties, began seeing outsized activity from buyers taking advantage of lower prices amid a depressed NFT market. While OpenSea has traditionally levied relatively sizable fees on its tokens, including a 2.5% take for itself on top of the 5% average for creator royalties, Sudoswap charges a flat fee of 0.5%, and nothing more. Popular platforms like Magic Eden and LooksRare noticed that the low fees were attracting buyers and have since made royalty-related charges optional, as have nicher platforms like X2Y2 and Blur.

The good news is that backlash against the wave has prevented huge platforms like OpenSea from making such a movement. Earlier this month, OpenSeam refused to say that it would continue honouring royalties. After significant backlash, including the cancellation of a drop from famed streetwear brand and NFT regular The Hundreds, OpenSea reversed its position four days later and pledged to enforce royalties going forward.
“Marketplaces should not enforce business models for creators, creators should,” an OpenSea spokesperson told Ad Age. “We don’t think a blanket ‘creator fees optional’ solution is an acceptable one…so we’ve spent the last several weeks brainstorming, debating and exploring more sustainable options that help balance the scales and put more power in the hands of creators.”

The most concerning element for artists is that Web3 initiallhy seemed like a safe space for us to have direct communication with an audience and make a fairtrade profit from our work. “I’m really worried for the overall ethos of Web3 because this space was established on the premise that the artists were finally getting paid the royalties that they deserve, and everyone was in agreement with that when they came in,” said co-founder of The Hundreds Bobby Kim, a.k.a Bobby Hundreds. Kim spoke to Ad Age in the four days before OpenSea reversed its position.

For this very reason, in order to maintain relationships with Web3 creators, brands will need to offer assurances.

One way is to fight for royalties by enforcing them at the marketplace level. Royalties cannot be enforced at the blockchain level, meaning whether or not they are honoured is up to each individual marketplace. But brands could code their smart contracts to exclude, or “blacklist,” marketplaces known to not honour royalties, thus ensuring that each sale will grant creators a cut. 

Blockchain Creative Labs, the Web3 studio of Fox Entertainment, is considering the blacklist option as an alternative for its partners. “That is going to be creators and brands making the decision [over] what is going to allow the marketplaces that are with creators to thrive versus the marketplaces that are seeking to serve speculators” said its president, Melody Hildebrandt. 

If brands are hesitant to resort to blacklisting, they could maintain relations with creators by ensuring their compensation through other means. One way is by offering them a higher cut of an NFT’s primary sale, also known as its “mint.” Each mint’s smart contract contains stipulations as to the parties receiving cuts of the sale, and the size of their respective cut. Brands could unilaterally increase creators’ cuts, though that would likely require decreasing the size of their own.

That said, there is the possibility that increasing the number of drops could dilute the value of each drop—a particular concern for Web3-native brands with core collections, like Doodles. For various reasons, some brands may not want to increase the number of drops, and in order to reach revenue goals, may not be able to forfeit portions of their cut. This could result in raising the price of the NFT, which would hurt the consumer. 

At the end of the day, royalties give the artists incentive to continue promoting the collaboration, with that element gone, the appeal of Web3 to artists could disappear. 

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