November 08, 2022

'And We'll Never Be Royals' If NFT Royalties Are Made Optional

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When NFTs first entered the mainstream in early 2021, the ability of artists and creators to receive resale royalties for their works was touted as one of the key features setting NFTs apart from other digital assets. In theory, if coded into the NFT's smart contract, royalty payments would be paid to the creator of an NFT automatically and in perpetuity each and every time the NFT is resold. This feature provided a huge benefit to artists who, in the past, have had no effective way of reaping any benefit from secondary sales of their physical or digital works. As of last month, Ethereum NFT creators have reportedly been paid a total of $1.8 billion in royalties from secondary sales. Although resellers likely haven't been thrilled about giving up a portion of the proceeds from a resale, it's a no brainer that artists would, of course, opt to code automatic royalties into their smart contracts.

In practice, however, the payment of royalties to creators has proven to not be so automatic after all. As my colleague explained in an earlier NFT Newsroom post, automatic royalty payments are only effective if the resale takes place on the same platform as the original sale because that platform is where the self-executing smart contract resides. If the NFT were to be resold on a different platform, the royalty provision coded into the smart contract would not necessarily be triggered.

Though once touted as a key feature of NFTs, there has been a noticeable shift away from royalties in recent months. Several marketplaces have now officially made the payment of royalties to creators optional - some have even eliminated royalties altogether - with LooksRare, a marketplace on the Ethereum blockchain, among the latest to abandon these mandatory payments. Other platforms which have shifted away from supporting mandatory royalties include Sudoswap and X2Y2, also on the Ethereum blockchain. A few weeks ago, Magic Eden, the top marketplace on the Solana blockchain, also made the jump to an optional royalty model.

This recent trend away from automatic, mandatory royalty payments begs the question: what can be done to protect creators, many of whom may have been enticed to enter the world of NFTs by the very promise of resale royalties? A few of these "royalty-free" platforms have built some form of protections into their new models. For example, LooksRare has announced that 25% of its protocol fees, which are essentially transaction fees already being charged to sellers, will be shared with creators in lieu of royalties. At Magic Eden and X2Y2, rather than eliminate royalties entirely, which were traditionally paid out from the seller's proceeds, buyers will be given the chance to set a royalty fee when they complete their purchase if they choose to do so. On these platforms, creators who hope to receive royalty payments will have to simply rely on the good will of buyers or, in the case of LooksRare, settle for a share of protocol fees which amounts to far less than the royalty percentage typically coded into smart contracts.

So, is there anything more that creators can do to increase their chances of receiving resale royalties now that marketplaces are increasingly choosing not to support mandatory royalties? That remains to be seen. However, NFT artists and creators may want to consider including resale royalty provisions in the terms and conditions governing the sale of their NFTs, rather than relying solely on the smart contract. While these terms and conditions will still come with their own set of questions -whether and how they can be made binding on future purchasers and resellers and, if so, who will be responsible for collecting and paying out the royalties, resellers or the platforms facilitating the sale - incorporating royalty fee provisions into the terms of sale of an NFT puts a greater degree of control back into the hands of creators.

"And We'll Never Be Royals", Royals by Lorde

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