Should NFT creators expect royalties? It was the question that caused so much debate recently in the NFT space. So let’s try to figure this out.

Why royalties are so important in the context of web3 - Tapx Blog

What are NFT royalties and how do they work?

A royalty is a payment made by someone who purchases goods or services from another person or company.

The payment is made in exchange for the right to use the product or service.

In web3, this opens up a bunch of opportunities. Every time someone sells the artwork as an NFT on a secondary market, the creator would also get a percentage of those sales as royalties.

NFTs can be a solution for digital art ownership. If we compare the digital art market with the traditional art market, we see that in reality there are many problems for both artists and buyers. System of auctions and art dealers, ie. intermediaries between artists and buyers mainly developed in the 18–19 centuries.

 

The NFT market gives artists the opportunity to sell their artworks without intermediaries, and therefore without paying a commission and receiving income from their art directly. Creators can also receive royalties every time someone sells their artwork on an NFT marketplace. This is a game changer that makes the NFT art market much more honest and democratic.

It’s a big thing for many artists who have faced the unfair web2 reality when all the content they create actually belongs to the big platforms that capture most of the value.

However, some believe that NFT creators shouldn’t expect royalties.

Does every NFT creator receive royalties?

No, and that’s the main point of creator royalty debates that are happening now, and, let’s be honest, they will not go anywhere in the near future.
The truth is, royalties are not enforceable at the smart-contract level. We are dependent on third-party entities (NFT marketplaces) to execute the royalty payments.

 

But there’s a problem. There are a lot of different NFT marketplaces out there and they don’t all handle royalties in the same way. Some of them, like Sudoswap, don’t pay royalties at all.

So we’re in a situation now where there isn’t really a good unified standard of NFT royalties and marketplaces are the ones who are setting up the rules.

 

There is an EIP 2981 standard that can be used to provide a calculation of what royalty payments should be made to creators. However, the standard came out in 2020, when a lot of the NFTs were already in the air. So the NFT marketplaces weren’t using it because the standard wasn’t there and so they had to roll out their own solution.

 

For instance, OpenSea doesn’t support the 2981 standard at the moment. It has its own standard,creators can actually set up to 10% fees for their collections. the user gets to choose how much royalties they take (up to 10%) and 2.5% as a marketplace fee.

Rarible, on the other hand, does support 2981 and then Zora, another NFT marketplace, has its own concept of a “creator share”, which is a percentage that they will receive for all future sales.

 

So part of the issue right now is how do you calculate royalties and how do you pay them out? There is EIP 2981, but not everyone’s using it. And even if everyone uses one standard, this doesn’t solve the problem entirely. All the 2981 standard does is it will calculate what royalties NFT creators want to receive, but the smart contract doesn’t actually do the transfer of those royalties. Creators are still dependent on the NFT marketplace to actually send those royalties.

But here’s the thing, the grand idea behind web3 is about providing creators full ownership of the content they create and letting them earn a share every time their work is sold. And now we see that it’s not working as it should.

Royalty Registry can provide a possible solution. With Royalty Registry, it’s now possible for smart contracts that did not initially support creator royalties to add them. This would effectively make it easier for marketplaces to use appropriate on-chain royalty configurations instead of a centralised model.

So how do we solve this issue?

The NFTs debate is hot, but the solution isn’t here yet.

Since there’s no unified standard to set the rules and royalties can’t be enforced on a smart contract level, it all down to the human element.
Here’s when the power of social3 comes to play. This is a cultural and social thing. NFT collectors choose to pay their royalties. They choose to use marketplaces that pay these royalties to creators. the collectors of NFTs, choose to pay our royalties. Not because it’s the right thing to do, but because people genuinely want to support creators. This is the ethos of web3.

It’s a great idea that could actually work in a perfect world, where NFTs are bought by collectors who truly appreciate the work and not by those who are trying to speculate and get rich fast. The latter, in the end, also have a choice — they can buy NFTs on marketplaces that don’t support royalty payments.

Another way to incentivise collectors to pay royalties is to implement royalties that change over time. For example, if you hold an NFT for a long time, you pay less royalty % to the creator. Again, interesting in a perfect world where there’s no room for speculation and hype.

What can artists do about collectors and marketplaces that don’t honor their royalties? They could potentially exclude such buyers from ongoing benefits and perks.

There’s so much room for experimentation.

At the end of the day, there’s no one-size-fits-all. There are a lot of nuances to take into account. Is the art piece from a solo artist more valuable than a 10 000 PFP collection? Should royalties depend on the reputation of an artist? How can a collector make sure he’s paying the creator of the art piece, not someone who just copied the work… and much more. Right now, it can’t be solved by technology.

Why might people want to pay royalties?

In order for creator royalties to be paid, people have to want to pay them.

Some time ago, we were talking about the future of NFTs with Pauline from Artpool, the platform for art professionals and NFT collectors. She mentioned that NFTs have a huge potential to help artists be rewarded for their work as they deserve it. Bringing artists and curators into the web3 space has a huge potential.

In the upcoming years, NFT art will move toward uniqueness since more artists will join the space and make their pieces more exclusive and hence, more attractive for collectors. Hence, the utility of art NFTs will be different from those 10000 pieces collections that are so popular now.
The main utility of the art NFTs, just like every other piece of art, is the story behind the work, says Pauline.

Collectors would want to pay royalties to support creators and their vision, to become a member of a like-minded community, and to help the creator economy thrive.

Creator fees are not going anywhere. But if collectors don’t want to pay royalties to artists, should they have this option?  Are services like Sudoswap benefiting the NFT space by giving traders a choice? Or are the artists the ones who should have the final say? The questions remain unanswered.

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