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Royalties in the digital art market have become a hot-button topic since several NFT marketplaces, including LooksRare and Magic Eden, made paying royalties to artists optional.
If you ask Jacob Horne, co-founder of the NFT marketplace Zora, things are headed in the wrong direction.
"Royalties were one of the most compelling features of crypto to artists coming into the space," Horne said on the new episode of Decrypt's gm podcast. "Because that's been such a long-standing problem in the traditional art world or music world or any creative art form."
Horne pointed out most NFT marketplaces are likely heading to a zero-royalty policy in 2023, a move that, while pleasing many buyers, could harm digital artists’ ability to make a living with their work.
NFTs or non-fungible tokens prove digital ownership on blockchain and provide a tamperproof record of digital asset transactions. NFTs are most commonly attached to digital art, but can be linked to other digital media like movies, music, TV shows, or real-world assets.
Creator royalties are fees associated with the sale of NFTs, typically between 5% and 10% of the sale price, paid by the seller to the original creators of a given NFT project.
"The fact that the early NFT wave touted royalties is such a strong feature," Horne said. "And it did work for some time, but has led us to this moment right now where the actual functionality of those royalties is being challenged in practice. And we're having to rethink, what does artist ownership look like in this context?"
In August 2022, NFT Marketplace Sudoswap changed to a zero-royalty model, and X2Y2 instituted "flexible royalties." A growing list of marketplaces followed by either eliminating creator royalties or making them optional.
In October, NFT marketplace LooksRare announced it would no longer enforce royalties and instead offer artists a share of protocol fees. Popular NFT project DeGods also said, in October, it would move to its next "experiment," and instituted a 0% royalty policy.
According to Horne, the space has to rethink what artist ownership looks like. "Basically, what happened is a new number of marketplaces came onto the market and allowed collectors and traders to intentionally avoid royalties," he said. "And then when you see royalties ranging from five to twenty percent, that has a huge impact on how speculative traders relate to these things, because they can say, 'Five to twenty percent on a trade? That's massive.'"
In October, Magic Eden, the most popular marketplace for Solana NFTs, announced it would no longer strictly honor creator-set royalties on NFTs sold through its platform.
"After some difficult reflection and discussions with many creators, we've decided to move to optional royalties," the platform tweeted. Magic Eden also said it would waive its platform fees during a promotional period in an apparent bid to win back traders.
🧵After some difficult reflection and discussions with many creators, we’ve decided to move to optional royalties on @MagicEden.
Effective later today, we will also begin running a promotion to waive our platform fees.
— Magic Eden 🪄 (@MagicEden) October 15, 2022
After several weeks of backlash, OpenSea and Magic Eden announced they would integrate royalty enforcement tools.
In November, OpenSea announced a new royalty enforcement system that provides code for Ethereum NFT creators to insert into their newly-launched NFTs. These smart contracts point to a blocklist that blocks those NFTs from being traded on any zero-royalties or royalties-optional marketplaces.
By December, Magic Eden launched the Open Creator Protocol, which it says can enforce creator royalties on Solana NFTs that use the tool. Similar to OpenSea's, the new protocol allows NFT creators to block marketplaces that won't honor royalty fees on eligible assets.
"I think the moment we're in now is, how can we start to think of new royalty models that don't rely on secondary trading, but actually start to allow artists to retain ownership of the collection themselves up front," Horne said, going on to suggest a universally-set royalty percentage as a possible solution.
"I'm very sympathetic to the artist side because it was one of the largest selling points, and now that's being challenged."