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Here’s What You Need to Know About the NFT Creator Royalty Debate

BY Langston Thomas

August 26, 2022

Creator royalties have remained a prominent facet of the NFT market for years. Even in the early days of the Web3 creative economy, artists of all creeds could sustain themselves through a mix of income from primary sales and kickbacks received via secondary market royalties.

Yet, while creator royalties seem crucial, they aren’t hard-coded into the market — much less individual smart contracts. Creator royalties, sometimes called creator fees, are optional and only implemented to reserve a certain percentage of each secondary sale (peer-to-peer trades), which is sent back to the NFTs originator.

Yes, the truth is that creator royalties are optional, but still nearly impossible to avoid in the NFT space. That could be a good or bad thing, depending on who you ask, since decentralized payments are facilitated by centralized means.

Take OpenSea: If an artist’s NFT sells on the secondary market on OpenSea, the platform itself receives the royalty via the transaction. It’s only after that royalty is received that OpenSea, in this situation acting as an intermediary, sends the royalty payment to the artist.

But arrangements like OpenSea’s aren’t the end-all-be-all. The advent of services like manifold could change it. With manifold’s Royalty Registry, it’s now possible to add creator royalties to smart contracts that did not initially support them. This would effectively make it easier for marketplaces to use appropriate on-chain royalty configurations instead of the aforementioned centralized model. 

This is precisely why a debate around the necessity of creator royalties — and the viability of continuing to be facilitated by intermediaries — has been bubbling up recently, effectively dividing the community yet again over the utility of NFTs.

What’s the big deal with creator royalties?

Until recently, creator royalties have been taken for granted within the NFT space. Similar to the concept of, say, tipping a waiter after a meal, creator royalties exist as a socially accepted process — but one through which creators can receive residuals from collectors every time their art is resold.

This is a fantastic system for creators, but not necessarily for collectors.

While it has become commonplace to pay both a platform fee and creator fee when collecting an NFT, some collectors would rather not shell out an extra five percent on top of their already sizable transactions. Creator royalties mean that the individual who created a piece of art is rewarded in conjunction with collectors, but — since some NFT price tags reach well over $1 million — we’re talking more than $50,000 in fees alone paid by the collector. 

But why wouldn’t we want to pay creators for their work, especially if it means that others profit time and again? Take XCOPY, for example. The artist, who originally sold pieces for a few hundred dollars each, now has a suite of works worth millions. Yet, before he saw seven figures from his primary sales, collectors trading his pieces peer-to-peer helped his catalog accrue value. The royalties he received through these secondary sales likely helped sustain his career as he continued to create new art.

But again, while creator royalties are a norm, they are only enforced through user agreements created by NFT marketplaces. While some smart contracts are coded to allow for the easy integration of creator royalties, it’s up to these marketplaces to honor these royalty agreements.

Because of this, and the differing opinions throughout the NFT ecosystem, creator royalties have lost favor with a portion of the NFT community. While we can’t draw a direct line back in time to whence this conversation surrounding creator royalties started, some recent announcements from NFT platforms and marketplaces have undoubtedly fanned the flames of this budding dispute.

Those against creator royalties

The vast majority of NFT enthusiasts are in favor of creator royalties. Many have even taken to social media to defend this facet of the NFT ecosystem. But while artists and collectors are undoubtedly spearheading this debate, platforms like sudoswap, and NFT marketplace X2Y2 have emerged as the most prominent opponents of creator royalties.

Recently, sudoswap announced the public release of its new marketplace protocol — one that comes with no support for creator royalties. How is this possible, when so many other marketplaces have implemented royalties as a standard?

Well, sudoswap is an automated market maker (AMM) that functions as a token swap and liquidity service. It allows users to sell their NFTs without first having to find a buyer. On sudoswap, users can swap an NFT directly for ETH without needing to accept a bid or wait for someone to purchase their NFT. And because the platform is solely for peer-to-peer trading, NFT creators have no say in how their collections are represented or tokens are transacted.

Yet, while sudoAMM isn’t great for creators, it remains popular with collectors as its fees are significantly lower than other platforms. As most popular NFT marketplaces charge a platform fee of around 2 – 2.5 percent, with an extra 5+ set by creators, sudo has cut its trading fees down to 0.5 percent.

While platforms like sudoswap are getting rid of creator royalties altogether, others are allowing collectors to decide whether or not to send a kickback to artists. This is the philosophy of X2Y2, which recently announced that buyers on the platform would be empowered to choose the amount of royalties, if any, they would like to contribute to artists and projects.

Why the creator royalty debate matters

Beyond the platform-specific examples of creator royalty opposition, a rift is forming in the NFT space. And, much like the debate on whether art needs utility, it may simply come down to a question of morality and the underlying functionality of NFTs.

Simply put, NFTs don’t come with built-in royalty splits. This is something that must either be offered or honored by NFT marketplaces. While most platforms offer creators the ability to set royalties, it is not necessary. And whether or not a royalty percentage is set at a smart contract level, marketplaces have the opportunity (not a requirement) to honor and implement royalties.

While many have weighed in on the topic, Beeple may have perfectly distilled the argument down to a humanistic proposition: The royalty debate hinges on collective morals. And morals in the space remained unchallenged as creator royalties became the norm throughout the NFT market. If sudoswap and X2Y2 have shown us anything, it’s that the NFT space has a need for discussion on how these norms are set, and whether or not they need to be honored.

As Dom Hofmann, co-founder of Vine and innovative NFT projects like Loot and Blitmap put it in a tweet, the discussion surrounding creator royalties is “a boring mechanical debate and an interesting cultural one.” This seems to ring true, since enforcing a mandatory creator fee is undoubtedly feasible, but again calls into question the centrality of such an action in a space that thrives on the idea of decentralization.

If collectors don’t want to pay royalties to artists, should they have more choice in the matter? Can the NFT space truly benefit from services giving traders a choice? Or are the artists and those minting content the ones who should have the final say? The jury is still out.

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