When sales of NFTs (non-fungible tokens) skyrocketed in the spring of 2021, the art world held its breath for a change in digital culture. While many old guards, academics and critics rolled their eyes at the notion of purely virtual art enterprises, business-minded artists everywhere rejoiced; NFTs would theoretically provide secondary sales royalties, an opportunity for recurring passive income that has historically eluded artists in many jurisdictions. But much has changed since the heyday of NFT trading last year – with sales down nearly 99%, a 15-month low in an already volatile sector, according to Reuters, and creators feeling the pressure.
Axios has announced that four separate crypto markets will stop honoring artist royalties, a worrying trend that impacts those who first brought blockchain into the cultural consciousness. In particular, Magic Eden and LooksRare have shifted to licensing models that allow buyers to decide whether to pay creators the usual 3-10% of the sale price for NFTs. The motivation is clear: traders want larger profit margins when selling NFTs, and platforms want to retain and reward traders who buy in bulk, a practice that compounds fees steeper than one-off purchases. These developments have prompted investors to speculate whether the NFT bubble is finally ready to burst.
While NFT creator fees are contracts, the blockchain code cannot actually enforce the terms of token transfer, so these contracts are essentially voluntary. Operationally, royalties on the blockchain have never been guaranteed; instead, each NFT’s documentation only requires license fees, a practice that platforms used to follow under more favorable market conditions.
“There is ZERO way to technologically enforce royalties”
Artist Mike Winkelmann, better known as Beeple, who famously sold NFT at Christie’s in March 2021 for $69.3 million (including fees), tweeted: “There is ZERO way to technologically ENFORCE royalties,” and insisted that creators should “build a collector. foundation he WANTS[s] honor these royalties”.
Although marketplaces like LooksRare tried to offset the damage by introducing a 25% reduction in protocol fees for creators, criticism came quickly. NFT artists and watchdog communities like the Immutable X cryptoecosystem are naming and shaming royalty-dodging platforms, blacklisting them, and threatening mass sales. For now, Ethereum market leaders MakersPlace and OpenSea are maintaining their fee-favoring policies; in a public statement, MakersPlace CEO Craig Palmer even stated that “optional access” did not fit his “vision for the space.”
Barriers to flexibility
In November, OpenSea CEO Devin Finzer announced that mandatory creator fees would be charged for new NFT collections. “We believe creators should have the power to build the collections and communities they want, and buyers and sellers should continue to have the freedom to choose which collections to join and which not to,” he blogged. Even so, the code that Ethereum NFT creators can put into these new collections will necessarily prevent them from being traded on other marketplaces, a hindrance to flexibility-minded sellers.
“All of this speaks to the ways in which the ideologies of Web 2.0 are still in Web 3.0,” says Margaret Murphy, multidisciplinary artist and community leader of Misa.Art, Berlin’s NFT marketplace. “What feels different, though, is the way artists and creators are pushing back against it.” He adds that not all platforms seem to be plagued by this embittered dynamic between artists and sellers. “In my experience, Tezos is a blockchain that aligns in favor of the artist, unlike Ethereum,” he says. “Maybe this conversation is really about getting rid of the capitalist motivations behind the NFT-to-Ethereum dump that is destroying Web 3.0.”
“Maybe the conversation is really about getting rid of the capitalist motivations behind the NFT-to-Ethereum dump that is destroying Web 3.0”
Tezos is not the only beneficiary of an artist-centric approach. As of October, Cardano NFTs have officially become the third largest NFT trading protocol, thanks in no small part to their creator-friendly royalty policy. Artists looking to keep their royalties have identified Cardano as a viable alternative to the two most popular blockchains – Ethereum, a larger, user-friendly platform, and Solana, a smaller, newer marketplace with higher speed and lower transaction costs. Spaces that reduce creator fees are primarily supported by Solana, but Ethereum-based policies also prevent sellers from trading on other platforms, ultimately undermining the malleability that both sellers and creators value.
The tendency to eliminate fees for NFTs reflects a general trend towards cutting corners in the cryptosphere. After cryptocurrency exchange Binance.US removed fees for spot bitcoin trading last July, fee compression has become a feature of the sector’s business ethos. While technology-enhanced efficiency can reduce the cost of doing business, it can also spell its own doom for NFT traders. OpenSea’s commitment to artists’ royalties may impede broader economic trends, but as a side effect it may minimize diversification across blockchains.